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22–429pdf 2005

S. HRG. 109–169

MID-SESSION HEARINGS ON THE 

BUDGET

FOR FISCAL YEAR 2006

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

April 21, 2005—STRUCTURAL DEFICITS AND BUDGET PROCESS 

REFORM

June 15, 2005—SOLVENCY OF THE PENSION BENEFIT GUARANTY 

CORPORATION—CURRENT FINANCIAL CONDITION AND POTENTIAL RISKS

July 20, 2005—HEALTH INFORMATION TECHNOLOGY: THE FEDERAL 

ROLE AND BUDGET IMPLICATIONS

(

ii

COMMITTEE ON THE BUDGET 

JUDD GREGG, New Hampshire, Chairman 

PETE V. DOMENICI, New Mexico 

CHARLES E. GRASSLEY, Iowa 

WAYNE ALLARD, Colorado 

MICHAEL ENZI, Wyoming 

JEFF SESSIONS, Alabama 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN ENSIGN, Nevada 

JOHN CORNYN, Texas 

LAMAR ALEXANDER, Tennessee 

LINDSEY O. GRAHAM, South Carolina 

KENT CONRAD, North Dakota 

PAUL S. SARBANES, Maryland 

PATTY MURRAY, Washington 

RON WYDEN, Oregon 

RUSSELL D. FEINGOLD, Wisconsin 

TIM JOHNSON, South Dakota 

ROBERT C. BYRD, West Virginia 

BILL NELSON, Florida 

DEBBIE STABENOW, Michigan 

JON S. CORIZINE, New Jersey 

SCOTT GUDES, Majority Staff Director 

MARY NAYLOR, Staff Director 

iii

C O N T E N T S 

HEARINGS 

Page 

April 21, 2005—Structural Deficits and Budget Process Reform ........................ 1

June 15, 2005—Solvency of the Pension Benefit Guaranty Corporation—Current Financial Condition and Potential Risks ................................................... 65

July 20, 2005—Healt Information Technology: The Federal Role and Budget 

Implications .......................................................................................................... 203

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Gregg................................................................................................. 1, 65, 203

Senator Conrad .................................................................................................. 6, 79, 204

Senator Feingold ...................................................................................................... 63

Senator Murray ........................................................................................................ 168

Senator Stabenow .................................................................................................... 186

Senator Bunning ...................................................................................................... 178

Senator Enzi ............................................................................................................. 184

WITNESSES 

Bradley D. Belt, Executive Director, Pension Benefit Guaranty Corporation......................................................................................................................... 91, 95

Alan Greenspan, Hon., Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 24, 55

Holtz-Eakin, Douglas, Director, Congressional Budget Office ......................... 131, 135

Michael O. Leavitt, Hon., Secretary, Department of Health and Human Services ..................................................................................................................... 214, 217

RESPONSES TO QUESTIONS SUBMITTED 

Responses to Questions submitted by Senator Bunning to Douglas HoltzEakin ..................................................................................................................... 192

Responses to Questions submitted by Senator Bunning to Bradley D. Belt ...... 194

Responses to Questions submitted by Senator Conrad to Michael O. Leavitt ... 254

Responses to Questions submitted by Senato Stabenow to Michael O. Leavitt . 254

(1)

STRUCTURAL DEFICITS AND BUDGET 

PROCESS REFORM 

THURSDAY, APRIL 21, 2005

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

SH–216, Hart Senate Office Building, Hon. Judd Gregg, chairman 

of the committee, presiding. 

Present: Senators Gregg, Domenici, Allard, Bunning, Crapo, Alexander, Graham, Conrad, Sarbanes, Nelson, Stabenow, and 

Corzine. 

Staff present: Scott B. Gudes, Majority Staff Director; and Dan 

Brandt. 

Staff present: Mary Ann Naylor, Staff Director; and Jim 

Klumpner. 

OPENING STATEMENT OF CHAIRMAN JUDD GREGG 

Chairman GREGG. It is a pleasure to convene this hearing and 

to have with us today the Chairman of the Federal Reserve, who 

has been such a force for fiscal responsibility not only in the United 

States but around the world, and who has had such a massive impact throughout his career in allowing for the proper and effective 

growth of the markets and making sure that capitalism moves forward in a positive and constructive way across the United States 

and across the globe. And so it is a great pleasure to have the 

Chairman here. 

I wanted to make a couple of opening comments just to try to put 

in context what I see as the concerns which this committee confronts, and then I will yield to my ranking member, and then we 

look forward to hearing from the Chairman. 

Because charts are the tradition in this committee as set by the 

ranking member, I have brought my charts. The problem which we 

have as a Nation was defined for us rather starkly by the Comptroller General of the country, who testified before this committee. 

He made the point—and this is a point which is rather startling 

but is accurate—that the unfunded liabilities which the Federal 

Government presently has on its books represent $44 trillion, 

which is this line on the left—$44 trillion, that is with a ‘‘t’’—of unfunded liabilities using the actuarial life of these programs that we 

have put on the books already.

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To try to put that in context, the total amount of taxes paid into 

the Federal Government since the Revolution, since we created ourselves as a Nation, are $38 trillion. That is the line on the right. 

And the total net worth, if you take everybody’s assets in this country—your cars, your houses, your stocks, your bonds—the total net 

worth of our Nation is $47 trillion. So we actually have on the 

books today a liability which we as a Government have put in place 

which essentially equals the net worth of the Nation. 

This liability is primarily driven by the fact that we have this 

massive generation known as the baby-boom generation, which is 

a demographic bubble of enormous impact, and has impacted our 


22429.029
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culture every time it has hit a generational event, whether it is 

adding schools in the 1950’s or changing the culture in the 1960’s. 

And it will have a massive impact when our generation, the babyboom generation, retires beginning in 2008, peaking around 2030. 

And the primary driver of this unfunded liability is the health care 

costs which this generation will burden our children with in supporting us. 

In fact, the Comptroller General mentioned or cited a figure of 

$26 trillion of the $44 trillion as being health care-driven costs. 

And the question becomes: How do we address that as a Government? 

Some have suggested, well, you can raise taxes to alleviate the 

Social Security issue or the health care issue, but I want to show 

one last chart here which reflects the fact that you really cannot 

tax your way out of this problem.

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Traditionally, the spending of the Federal Government has been 

about 20 percent of the gross national product. By about the year 

2030, three items of the Federal Government—Social Security, 

Medicare, and Medicaid—will absorb 20 percent of gross national 

product, if they are continued to be allowed to grow at their 

present growth rates. And we know this is going to occur because 

the people who are born, who exist, the baby-boom generation, will 

drive these costs. And that number goes up. 

So no matter how much you raise taxes, you cannot tax your way 

out of this issue unless you are willing to absorb massive amounts 

of the economy in supporting and addressing this fundamental 

question and you are willing to burden our children and our children’s children with huge tax increases. 

So we have to address these issues through policy that somehow 

manages better these entitlement programs. And I know that the 

Chairman has thought about this a lot and has given us counsel 

on this, and I hope that in today’s testimony he will give us further 

counsel and direction on this. And it does come down to a large degree of incremental steps, in my opinion, and the first incremental 

step is to pass a budget which actually starts to put some controls 

on entitlement spending, which is why it is so important that the 

budget which we passed in this committee—regrettably, it did not 

pass the floor of the Senate—which began the effort of addressing 

one of the two major health care accounts, specifically Medicaid, be 

reinstituted and passed by the Congress so that at least one of the 

elements that are driving out-year fiscal costs, Medicaid—the other 

two elements being Medicare and Social Security—will begin to be 

addressed. 

And with that, I will yield to the Senator from North Dakota. 

OPENING STATEMENT OF RANKING MEMBER KENT CONRAD 

Senator CONRAD. I thank the chairman, and I thank the witness, 

Chairman Greenspan, for being with us as well today. 

I thought I would just go through a brief review of where I see 

our fiscal situation and where I see it headed. Let me just go to 

this. This is the history of the budget deficit since 2001, and we can 

see now we are at a record $412 billion deficit in 2004. This graph 

shows some slight improvement. I wish it were so, but I do not believe it will actually occur.

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Let’s go to the next. If we look back to 1980 and look at the relationship between spending and revenue as a share of gross domestic product, which I think most economists, Mr. Chairman, would 

tell us is the right to compare over extended periods of time.

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The red line is the spending line of the United States from 1980 

to today and then the dotted line projected going forward. The 

green line is the revenue line of the United States. We can see the 

spending as a share of gross domestic product has come down quite 

substantially from the levels of the 1980’s and early 1990’s, and, 

in fact, we got below 19 percent of GDP. We have had a tick-up 

now as a result almost exclusively of increases in defense and 

homeland security and aid for New York. And we see going forward 

basic stability with some increase, some slight further increase in 

spending as we go forward. 

The revenue line, we can see when President Bush came in revenue was a historic high as a share of GDP, but look at what has 

happened. The revenue side of the equation collapsed. And last 

year, revenue as a share of GDP was the lowest it has been since 

1959. 

We see some slight improvement, but the projection going forward still leaves us at a revenue line that is far short of the traditional 20 percent that the chairman outlined in his opening remarks, leaving us with this substantial gap, very substantial gap 

between spending and revenue going forward. 

Let’s go to the next. That gap is of special concern now because 

this is before the baby boomers retire. This is the Comptroller General of the United States in a speech that he made to the National 

Press Club in February: ‘‘The simple truth is that our Nation’s financial condition is much worse than advertised.’’ I believe that. I 

think he has got it exactly right. I think the accounting system of 

the Federal Government misleads us. I think the language that we 

use about our financial condition misleads us, misleads the American people. I think it probably misleads our colleagues. Perhaps 

we even mislead ourselves.

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21173.227
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Let’s go to the next. When the Comptroller General talks about 

the situation being worse than advertised, the President and his 

administration tell us that the deficit is going to get cut in half 

over the next 5 years. But the only way it gets there is he leaves 

out things. He leaves out war costs past September 30th. He leaves 

out the need to fix the alternative minimum tax, which is rapidly 

becoming a middle-class tax trap. He leaves out the cost of his Social Security proposal.

13


21173.228
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When you add these things back in, the hashed red line is what 

we see happening going forward. He also only has the first 5 years 

of making the tax cuts permanent when we all know that the second 5 years, the cost of that proposal explodes. 

Let’s go to the next. So the harsh reality here is that our fiscal 

condition is not improving. The President told us back in 2001 that, 

‘‘My budget pays down a record amount of national debt. We will 

pay off $2 trillion of debt over the next decade. That will be the 

largest debt reduction of any country ever. Future generations 

shouldn’t be forced to pay back money that we have borrowed. We 

owe this kind of responsibility to our children and grandchildren.’’ 

And I agreed with that sentiment. I did not believe that he was 

right that his budget would actually wind up paying down debt to 

that degree.

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Let’s go to the next and just match that prediction with what has 

actually happened, because instead of paying down debt, the debt 

is exploding. The debt was $3.3 trillion in 2001, and we now anticipate a publicly held debt of over $9 trillion by 2015. So debt is not 

being paid down. Debt is increasing dramatically, $9 trillion by 

2015.

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Let’s go to the next. When we look at the budget that is before 

us and we look at what it would do—this is the budget that was 

passed in the U.S. Senate, and these are the calculations of what 

it would do to the debt in each of the next 5 years. Debt goes up 

$675 billion in 2005, $651 billion in 2006, $643 billion in 2007, 

$644 billion in 2008, $635 billion in 2009. This is not a budget that 

is improving our fiscal situation. The debt is going up each and 

every year under this budget by over $600 billion.

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Let’s go to the next. The place where the chairman and I agree 

is that we face a demographic tsunami because here is what is 

going to happen to us. This is the people eligible for Medicare and 

Social Security, and it is going to go from about $40 million to $80 

million. And it is going to fundamentally change everything.

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Let me just go to the next one, and then I will finish on that 

score. Comparing the long-term costs of Medicare and Social Security, the Comptroller General’s report shows us that the 75-year 

shortfall in Social Security is $4 trillion; the 75-year shortfall in 

Medicare, $29.6 trillion—more than 7 times as much.

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You know, the sooner we get at dealing with these long-term fiscal imbalances, the better off our country will be. My own judgment 

is I have serious doubts about these forecasts, by the way. I think 

the notion that over 75 years the economy is only going to grow 1.9 

percent a year, highly questionable to me. Over the previous 75 

years, the economy grew at 3.4 percent. If the economy grew in the 

same way it has in the past going forward, 90 percent of the Social 

Security shortfall would go away. 

That does not mean we do not have a problem. And I think that 

is what is so hard to get across to people, because even if the projections are wrong, we have a serious budget problem. And we have 

a serious budget problem because those Social Security bonds have 

to be redeemed out of current income. And this demographic 

change is going to lead to enormous pressure on the budget, made 

much worse by the shortfall in Medicare and the size of the current 

deficits. 

So we have, even if these projections are wrong, which I believe 

they are overly pessimistic—but if we all just look back at the last 

10 years, Social Security actuaries told us 10 years ago we are 

going to run out of money in 35 years. Ten years later, they tell 

us we are going to run out of money in 35 years. They underestimated economic growth. But even with that said, we have a serious 

problem, and the sooner we deal with it, the better. 

I thank the chairman. 

Chairman GREGG. Thank you. We do not call this the ‘‘Dark 

Cloud Committee’’ for nothing. 

[Laughter.] 

Chairman GREGG. Having heard those thoughts of optimism, we 

look forward to the Chairman shedding some more light on this situation, and we appreciate the Chairman taking the time to be here 

and to testify and give us his thoughts. 

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. GREENSPAN. Thank you very much, Mr. Chairman, Senator 

Conrad, members of the committee. I am pleased to be here to offer 

my views on the Federal budget and related issues. In this regard, 

I want to emphasize that I speak for myself and not necessarily for 

the Federal Reserve. 

The U.S. economy delivered a solid performance in 2004, and 

thus far this year, activity appears to be expanding at a reasonably 

good pace. However, the positive short-term economic outlook is 

playing out against a backdrop of concern about the prospects for 

the Federal budget, especially over the longer run. Indeed, the unified budget ran a deficit equal to about 3.5 percent of gross domestic product in fiscal year 2004, and Federal debt held by the public 

as a percent of GDP has risen noticeably since it bottomed out in 

2001. To be sure, the cyclical components of the deficit should narrow as the economy expands and proceeds forward and incomes 

rise. And the recent pace of the ramp-up in spending on defense 

and homeland security is not expected to continue indefinitely. But 

as the latest projections from the administration and the Congressional Budget Office suggest, our budget position is unlikely to imVerDate 0ct 09 2002 09:45 Nov 21, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 C:\DOCS\22429.TXT TISH PsN: LAF
25

prove substantially in the coming years unless major deficit-reducing actions are taken. 

In my judgment, the necessary choices will be especially difficult 

to implement without the restoration of a set of procedural restraints on the budget-making process. For about a decade, the 

rules laid out in the Budget Enforcement Act of 1990 and in the 

later modifications and extensions of the act provided a framework 

that helped the Congress establish a better fiscal balance. However, the brief emergence of surpluses in the late 1990’s eroded the 

will to adhere to these rules, which were aimed specifically at promoting deficit reduction rather than at the broader goal of setting 

out a commonly agreed-upon standard for determining whether the 

Nation was living within its fiscal means. Many of the provisions 

that helped restrain budgetary decisionmaking in the 1990’s—in 

particular, the limits on discretionary spending and PAYGO requirements—were violated ever more frequently; finally, in 2002, 

they were allowed to expire. 

Reinstating a structure like the one provided by the Budget Enforcement Act would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. 

Such a step would be even more meaningful if it were coupled with 

the adoption of a set of provisions for dealing with unanticipated 

budgetary outcomes over time. As you are well aware, budget outcomes in the past have deviated from projections—in some cases, 

significantly—and they will continue to do so. Accordingly, a welldesigned set of mechanisms that facilitate mid-course corrections 

would ease the task of bringing the budget back into line when it 

goes off track. In particular, you might want to require that existing programs be assessed regularly to verify that they continue to 

meet their stated purposes and cost projections. Measures that 

automatically take effect when costs for a particular spending program or tax provision exceed a specified threshold may prove useful as well. The original design of the Budget Enforcement Act 

could also be enhanced by addressing how the strictures might 

evolve if and when reasonable fiscal balance came into view. 

I do not mean to suggest that the Nation’s budget problems will 

be solved simply by adopting a new set of rules. The fundamental 

fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the 

unprecedented number of individuals approaching retirement age. 

For example, future Congresses and Presidents will, over time, 

have to weigh the benefits of continued access, on current terms, 

to advances in medical technology against other spending priorities 

as well as against tax initiatives that foster increases in economic 

growth and the revenue base. 

Because the baby boomers have not yet started to retire in force, 

we have been in a demographic lull. But this state of relative stability will soon end. In 2008—just 3 years from now—the leading 

edge of the baby-boom generation will reach 62, the earliest age at 

which Social Security retirement benefits can be drawn and the age 

at which about half of those eligible to claim benefits have been 

doing so in recent years. Just 3 years after that, in 2011, the oldest 

baby boomers will reach 65 and will thus be eligible for Medicare. 

Currently 3–1/4 workers contribute to the Social Security system 

26

for each beneficiary. Under the intermediate assumptions of the 

program’s trustees, the number of beneficiaries will have roughly 

doubled by 2030, and the ratio of covered workers to beneficiaries 

will be down to about two. The pressures on the budget from this 

dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending per 

Medicare beneficiary. 

The combination of an aging population and the soaring costs of 

its medical care is certain to place enormous demands on our Nation’s resources and to exert pressure on the budget that economic 

growth alone is unlikely to eliminate. To be sure, favorable productivity developments would help to alleviate the impending budgetary strains. But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more 

than part of the answer. Higher productivity does, of course, buoy 

revenues. But because initial Social Security benefits are influenced heavily by economy-wide wages, faster productivity growth, 

with a lag, also raises benefits under current law. Moreover, because the long-range budget assumptions already make reasonable 

allowance for future productivity growth, one cannot rule out the 

possibility that productivity growth will fall short of projected future averages. 

In fiscal year 2004, Federal outlays for Social Security, Medicare, 

and Medicaid totaled about 8 percent of GDP. The long-run projections from the Office of Management and Budget suggest that the 

share will rise to approximately 13 percent by 2030. So long as 

health care costs continue to grow faster than the economy as a 

whole, the additional resources needed for these programs will 

exert intense pressure on the Federal budget. Indeed, under existing tax rates and reasonable assumptions about other spending, 

these projections make clear that the Federal budget is on an 

unsustainable path in which large deficits result in rising interest 

rates and ever-growing interest payments that augment deficits in 

future years. But most important, deficits as a percentage of GDP 

in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to 

stagnate or worse. 

The broad contours of the challenges ahead are clear. But considerable uncertainty remains about the precise dimensions of the 

problem and about the extent to which future resources will fall 

short of our current statutory obligations to the coming generations 

of retirees. We already know a good deal about the size of the adult 

population in, say, 2030. Almost all have already been born. Thus, 

forecasting the number of Social Security and Medicare beneficiaries is fairly straightforward. So too is projecting future Social 

Security benefits, which are tied to the wage histories of retirees. 

However, the uncertainty about future medical spending is 

daunting. We know very little about how rapidly medical technology will continue to advance and how those innovations will 

translate into future spending. Consequently, the range of possible 

outcomes for spending per Medicare beneficiary expands dramatically as we move into the next decade and beyond. Technological 

innovations can greatly improve the quality of medical care and 

can, in some instances, reduce the costs of existing treatments. But 

27

because technology expands the set of treatment possibilities, it 

also has the potential to add to overall spending—in some cases, 

by a great deal. Other sources of uncertainty—for example, the extent to which longer life expectancies among the elderly will affect 

medical spending—may also turn out to be important. As a result, 

the range of future possible outlays per recipient is extremely wide. 

The actuaries’ projections of Medicare costs are, perforce, highly 

provisional. 

These uncertainties—especially our inability to identify the 

upper bound of future demands for medical care—counsel significant prudence in policymaking. The critical reason to proceed cautiously is that new programs quickly develop constituencies willing 

to fiercely resist any curtailment of spending or tax benefits. As a 

consequence, our ability to rein in deficit-expanding initiatives, 

should they later prove to have been excessive or misguided, is 

quite limited. Thus, policymakers need to err on the side of prudence when considering new budget initiatives. Programs can always be expanded in the future should the resources for them become available, but they cannot be easily curtailed if resources 

later fall short of commitments. 

I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than 

our economy has the capacity to deliver. If existing promises need 

to be changed, those changes should be made sooner rather than 

later. We owe future retirees as much time as possible to adjust 

their plans for work, saving, and retirement spending. They need 

to ensure that their personal resources, along with what they expect to receive from the Government, will be sufficient to meet 

their retirement goals. 

Crafting a budget strategy that meets the Nation’s longer-term 

needs will become ever more difficult the more we delay. The one 

certainty is that the resolution of the Nation’s unprecedented demographic challenge will require hard choices and that the future 

performance of the economy will depend on those choices. No 

changes will be easy. All programs in our budget exist because a 

majority of the Congress and the President considered them of 

value to our society. Adjustments will thus involve making tradeoffs among valued alternatives. The Congress must choose which 

alternatives are the most valued in the context of limited resources. 

In doing so, you will need to consider not only the distributional 

effects of policy changes but also the broader economic effects on 

labor supply, retirement behavior, and national savings. The benefits to taking sound, timely action could extend many decades into 

the future. 

Thank you very much. I look forward to your questions. 

Chairman GREGG. Thank you, Mr. Chairman, and you have certainly outlined a challenge to us, which is, I think, very appropriate. But the question is: How do we convert your challenge to 

action? And in a democracy, how do we actually get a Congress to 

act to be fiscally restrained when, as you have highlighted, the emphasis and the momentum is always toward expanding programmatic activity? 

You have mentioned one way to do it is to set up procedural 

mechanisms and reauthorizing the Budget Enforcement Act. The 

28

budget which we passed out of this committee had a large number 

of procedural mechanisms in it. They obviously were not by law because it was a resolution, not an act. But I guess my question to 

you is: This concept that you put forward of a mechanism that 

would review programmatic activity on a regular basis to see if it 

was affordable and appropriate, how would we do that relative to 

the entitlement programs, which are the drivers right now of Federal spending, representing 59 percent of Federal spending? I 

mean, I can see how we can do it to discretionary programs. Basically it is easy. But on the entitlement side, specifically Medicare 

and Medicaid, how do we do that? 

Mr. GREENSPAN. Well, I think that it would be difficult and probably unnecessary in Social Security because the elements that 

make up that particular program are very well defined, and we can 

calculate within very narrow ranges what the actual costs are. In 

that regard, it is, in fact, self-policing. The fact that we periodically 

go through evaluations—such as we did in 1993 and again most recently—suggests that, in fact, we do that for Social Security. 

Medicare and Medicaid are quite different. The actual numbers 

that are involved in the forecast, unlike the defined benefit structure of Social Security, are just plain economist forecasts. While 

there is some dispute on this question, the particular forecast 

which the trustees make of a gain in outlays per Medicare beneficiary moving faster by 1 percentage point of growth relative to per 

capita GDP growth is not a programmatic structure. Indeed, in my 

judgment, and I think in most people’s judgment, to get to 1 percent probably requires significant actions which the Congress has 

not as yet taken. 

But in items such as that, what you need to define is a certain 

level of outlays or certain commitments of real resources which are 

effectively available to open-ended programs such as Medicare. 

Chairman GREGG. So you are essentially saying take any entitlement program and make it a hybrid, which is basically partially 

discretionary? 

Mr. GREENSPAN. In effect, that is what it comes down to. 

Chairman GREGG. Well, how would you deal with the fact that 

you would inherently be knocking people—under entitlement, a 

person has a right to it. You would inherently be knocking people 

out of the benefit if you set it up as a discretionary, hybrid discretionary. 

Mr. GREENSPAN. Well, this is the fundamental difficulty that you 

are confronted with. This is why I say that we have committed 

more than our economy can provide. 

Chairman GREGG. I agree. 

Mr. GREENSPAN. And so if you are going to restrain Medicare to 

some level the economy can afford, of necessity it means that there 

will be less medical care available than is projectable under current 

law, and even I suspect that it is very difficult to know what that 

particular figure is. But this is what law-making is all about. You 

have in front of you an economic outlook which throws off real resources within a relatively narrow range. And we have essentially 

said we are going to give out more than what we have. Unless the 

laws of arithmetic are somehow altered—or hopefully in this respect completely eliminated—you have no choice. 

29

Chairman GREGG. Well, unfortunately, there is another law, 

which is called the law of majority rules, which usually tends to 

give out more than it has got, which is a problem. 

Mr. GREENSPAN. Well, what this country has been able to do over 

the generations is confront issues like this, and our democracy has 

struggled. It has tried to get around the issues. Eventually, we 

seem to work it out. 

Chairman GREGG. And I hope we can. 

Senator Conrad. 

Senator CONRAD. I thank the chairman. I thank Chairman 

Greenspan for being here as well. 

I think part of the frustration of many of us on this committee 

is convincing our colleagues that there really is a problem. And 

they are probably not going to be convinced unless the American 

people are convinced. And it is very hard to convince people there 

is a real threat to our collective economic security when the economy seems to be doing reasonably well. 

What would you say to the American people to convince them 

that there is a problem that requires action and that that action 

requires tough choices? 

Mr. GREENSPAN. I would first point out that the American economy is doing well, as you point out. We are in effect, as I said in 

my prepared remarks, in a demographic lull. 

Senator CONRAD. A demographic lull. 

Mr. GREENSPAN. Yes. Everybody knows there is a very large 

blocK of people currently employed in the work force, producing 

goods and services for the whole community. With the inexorable 

turn of the calendar, they will retire and we will have an utterly 

unprecedented change in the society where a huge number of people will be retired, and be retired for a long period of time, as longevity continues to increase. 

Because of the very substantial shift out of the labor force into 

retirement and because of the fact that the generations subsequent 

to the baby boomers are much smaller, the number of people who 

will be working, producing goods and services for not only themselves and their families but for retirees as well will be much 

smaller. Remember, when we talk in terms of dollar amounts of 

Medicare or Social Security, we are talking about dollars and 

claims to real resources. But in real time, all of those real resources 

are being produced by that work force, which is growing very slowly. Unless productivity accelerates at a pace far in excess of what 

we are currently projecting, there are going to be fewer goods and 

services to be distributed over a larger population. 

Senator CONRAD. Can I ask you—what you are saying is people’s 

way of life is going to be affected negatively. 

Mr. GREENSPAN. Correct. 

Senator CONRAD. Can I try to connect another dot here? Because 

you made reference in your testimony about a pressure on rising 

interest rates as a result of these collective deficits, buildup of debt, 

I assume you are including our trade deficit circumstance as well. 

Mr. GREENSPAN. No, I am just talking strictly in terms of the 

Federal budget deficit. 

Senator CONRAD. Just in terms of the Federal budget deficit, that 

this is going to put upward pressure on interest rates. 

30

Mr. GREENSPAN. Yes. 

Senator CONRAD. Can you help people understand what the effect of rising interest rates might be on the strength of our economy, on what it would mean for, for example, the housing market? 

I heard the other day, Mr. Chairman—the chairman of the committee—that a rise in interest rates, a relatively modest rise, might 

lead to a rather significant reduction in home values in parts of the 

country because there has been such a run-up in those values. 

Mr. GREENSPAN. Well, a rise in interest rates per se need not do 

that. What history tells us is that a rise in interest rates will, one, 

curtail new construction because the moneys that are borrowed 

from long-term assets—and homes tend to be long-term assets—are 

very sensitive to what long-term interest rates are. It is also the 

case that the turnover of existing homes is itself a function of interest rates. 

One would presume that to the extent that the turnover and construction falls—because demand is falling—prices will certainly 

slow from their very significant rate of increase. But it does not 

necessarily follow that they go down. They may but that is not 

clear from the data. However, clearly, if you talk about an extraordinarily large rise in long-term interest rates, then, of course, one 

would have to envisage such an event. 

Senator CONRAD. I thank the chairman. 

Chairman GREGG. Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

Mr. Greenspan, I want to thank you for your advice. I want to 

ask you a general question about structure of the budget, and I 

want to compare it to the experience I had when I was a Governor. 

What I felt then and what I still feel today is that there is an 

air of unreality about spending here, as we make spending decisions, as compared with the decisions I had to make as a Governor. 

For example, here we are about to increase spending in the Federal 

budget by about $100 billion. That is about a 4-percent increase. 

In my experience, that is a big increase. Everybody here is 

gnashing their teeth and wailing about that. We tried to restrain 

the growth of Medicaid spending from 41 percent growth over 5 

years to 39 percent over 5 years in growth. Everyone here is calling 

that a cut. I used to call that a big increase. And I was wondering 

why, when I get on the plane and fly from Nashville or Knoxville 

to Washington, suddenly it all changes. And why in correcting that 

attitude or environment in which in State capitals around the 

country, States are able to every year balance their budgets as one 

way of restraining things. The current Governor of Tennessee is 

trying to cut 323,000 people off our Medicaid rolls, which is a big 

number out of a total of 1.4 million, because he does not have the 

money to provide Medicaid to that optional population and to provide for K–12 education. He would have already done it, the legislature would have already overwhelmingly approved it—he is a 

Democrat, by the way—except for the fact that he has to get permission from us in Washington and two Federal judges. 

So there seems to be in the State capitals a different attitude, 

and there are three parts of budget structure I wanted to ask you 

about that are different there than here. One is the requirement 

for a balanced budget. Two is the division of budgets into a capital 

31

budget and operating budget, and if you are going to do it here, you 

would add Social Security to that. The argument could be that if 

we did that here, instead of having this unified budget, we might 

more clearly see what we were doing. In other words, in a State 

government, you know you are going to borrow money for capital 

projects, so you go ahead and borrow it. But you limit your borrowing from the operating budget. 

So if everyone can see that here in Washington we have a Social 

Security budget, what goes in comes out of that; we have an operating budget, in and out; and then we have a capital budget, in and 

out. That would be more like the way States do it. 

And then the third would be something that I will let Senator 

Domenici talk more about, because he is the primary exponent of 

it, the idea of a 2-year budget, which about 40 States used to have, 

about 20 States still do, and which, arguably, would provide more 

time for us to do authorization and oversight and more time to 

maybe be back home where people expect you to not spend very 

much more than comes in. 

I suppose one last thing—which would be a fourth thing, and it 

might be small—is this odd October 1 fiscal year we have. That is 

a bigger problem for most people, I think, than we think about. 

Nothing else in the world I know operates on such a year. It is confusing to me even to know what fiscal year we are in. And just that 

uncertainty and irregularity, it seems to me, creates the kind of 

confusion that permits all this extra spending to go on. 

So my question is: Balanced budget, or dividing the budget into 

capital, operating, and Social Security, 2-year budget, or maybe 

even the October 1 fiscal year—would any of those things help create an environment that would limit the air of unreality we seem 

to have here about excessive spending? 

Mr. GREENSPAN. Well, Senator, as you may recall, before we had 

the October 1st date, we had July 1st, and that was there largely 

because July 1st was the beginning of the crop year and where 

most revenues and outlays really mattered. So when you are looking at a fiscal year different from calendar year, it is wholly a historical accident, and one can very readily change it. We did, remember, change it not all that long ago from July 1st to October 

1st. 

The basic issue of a balanced budget, of course, is which budget 

is being balanced, and we have several. In the context of what Senator Conrad was raising previously about broader budgets, the real 

interesting issue is how would the Federal Government look if we 

went to an accrual basis, which is essentially what private business 

does. We would know very rapidly the level of the commitments 

that we are making for the future because it shows up in current 

outlays. And, indeed, in that context, we would have a significantly 

larger deficit since it would be accruing a backlog of outlays for a 

number of entitlement programs. The surpluses that we had in the 

unified budget would not exist in the accrued budget. The unified 

budget is an excellent portrayal of the direct impact of the Federal 

Government on the private economy and the savings, or surplus, 

and deficit, or dissavings, in the unified budget corresponds to the 

savings flows in the private economy and, hence, is a very useful 

32

vehicle to understand the short-term immediate impact of Government in the economy. 

But more and more of our outlays are entitlements—or as we 

used to call them, ‘‘uncontrollables’’—they were very small back 

then when we called them that. The notion of the short-term impact as the critical issue has gradually faded, and we are finding 

that the real critical impact of the Federal Government is the commitment to the future. If we were to go to an accrued budget, we 

would know what that was. Indeed, it is reflected in the chart 

which Senator Conrad showed previously, and specifically the chart 

which the chairman showed with respect to the $44 trillion, as I 

recall, of the aggregate amount of unfunded liabilities.

33


22429.028
34


22429.030
35

That is merely what the accrual system throws off, and instead 

of having that as a contingent liability, which is really what we call 

it, it would be part of the actual debt, and we would learn a great 

deal about what we are doing when we are committing to the future, which I don’t think we have a full understanding of at this 

particular stage. 

I have always advocated that we take Social Security off the 

budget as the only way to take the law seriously. If we do take the 

law seriously, we would actually create new savings, which we 

need to finance the real investments that are required to turn out 

the real goods and services which retirees will need in retirement. 

So that is a useful tool, but the critical issue gets to an accrued 

budget or one which is basically a private sector accounting system. 

The capital budget is a very tricky issue. The capital budget is 

something that the private sector uses because there are revenues 

that come from capital investments. Where revenues do come from 

capital investments in the Federal sector, there is a good argument 

for leaving them in a special category. Whether you call it on or 

off budget is not very important. But to take all of what we now 

consider investments, which include the military, is a very interesting and very debatable issue. I think I would prefer that we stay 

with the far more limited capital budget notion equivalent to what 

is basically in the private sector. 

With respect to the 2-year budget issue, I think there is a great 

deal of merit in it. It is more of a technical issue of how the Congress operates, and Senator Domenici is far more knowledgeable on 

that issue than I, and I would clearly defer to him on that question. 

Chairman GREGG. Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman. And welcome 

again, Mr. Chairman. 

As I listened to your thoughtful statement, which I appreciate 

very much, it appears to me the bottom line is we have more 

money going out than coming in, and there is a question on both 

ends, on whether it be spending as well as revenue. And when we 

look at where we are, I mean, the 2004 budget deficit, $412 billion, 

which about equals everything we are spending this year that is 

nondefense. I mean, defense is about half the budget. Everything 

else, whether it be education, the environment, veterans’ affairs, 

homeland security—everything else we do is about half the budget. 

So we could eliminate half the Federal budget, discretionary budget, to eliminate the deficit. 

And so it appears to me that it is more than just about spending 

even though spending obviously is a critical thing, and I supported 

the balanced budget agreement in 1997 when I was in the House, 

to limit that. But it is more than that. We obviously have to look 

at the revenue side in terms of the tax policy decisions we are making. 

When I look at your thoughtful comments about medical technology, I am drawn to the fact that this year we will spend less 

on the National Institute of Health to create new technologies, 

whether it is Alzheimer’s or Parkinson’s or juvenile diabetes, whatever those issues are that directly relate to people’s quality of life 

for themselves and their families, we will spend less on NIH this 

year than those earning over $1 million will receive in tax cuts, $32 

36

billion in tax cuts. Not to beat up on our wealthiest Americans, but 

it is just a values question in terms of what is most important. 

My first question to you relates to how we get this back in control, and back when we were doing the original tax cut, the determination was made to basically take all of the surplus in 2001, 

rather than dividing it up among investments and strategic tax 

cuts and paying down the deficit, all of it went into basically the 

tax cuts, the majority. 

But Senator Bayh and Senator Snowe and I worked on an issue 

called a trigger, which I think is indirectly what you are speaking 

of, it appears, within the context of future decisions. And I wonder 

if you might speak to that. If we had, in fact, passed that trigger 

that we had spoken about in terms of not proceeding with each tax 

cut, each phase of it unless we could pay for it, or new spending 

unless we could pay for it, we would not be where we are right 

now. We would have had some balance there. And I wonder if you 

might speak to the notion of a budget mechanism, a trigger for the 

future. 

Mr. GREENSPAN. Well, Senator, if you go back to 2001, when we 

were all looking at these huge surpluses, everybody had an idea of 

how much we should cut taxes—and there were differences, but everybody was in favor of cutting taxes and increasing spending essentially—to get rid of the surplus. 

What was fascinating about that period is that even though there 

were a number of people who just looked at the size of the longterm surpluses and said this is extraordinary, it has never happened before, it probably will not happen now, the people who 

knew most about the projection—CBO, OMB, the Federal Reserve—who really went into the details, you would prod them and 

they would still say it is very difficult to come up with a forecast 

that does not have a chronic long-term surplus. 

But what a number of people were suggesting at that time was, 

why don’t we have a contingency plan that in the event it isn’t the 

case so that we could review it. In the testimony in which I was 

advocating significant tax cuts, there is also the notion of however 

we may be wrong, let’s put a trigger in. It never passed. It never 

got any real interest. And as you point out, that is unfortunate because we would have found that a number of things would have occurred differently. 

But one of the real problems we have had was allowing PAYGO 

to lapse in September 2002. 

Senator STABENOW. I agree. 

Mr. GREENSPAN. Were we still under a PAYGO regime, which I 

thought worked very well, I think we would have fewer problems 

now. We would still have the longer-term problems. It is obviously 

not going to affect the trend of Medicare. But procedures and process do matter. They do not override an overwhelming desire on the 

part of the Congress to go in a certain direction. Congress will do 

what it perceives it should be doing. But it has been my experience 

that how you set up procedures does alter the rhetoric and does influence the ultimate outcomes. 

I did not believe that a budget act which passed in 1990 with 51 

percent of the vote could tie the Congress’ hands as it did in subsequent years. You did not have what I thought would occur very 

37

readily, that as soon as you ran into pressure, 51 percent of the 

Congress would say let’s throw this out. You did not. The fact that 

you did not actually constrained what went on in the early part of 

the 1990’s and through a goodly part of that decade. I think we 

would be far better off if we got back to that type of structure sooner rather than later. 

Senator STABENOW. Thank you, Mr. Chairman. 

Chairman GREGG. Senator Allard. 

Senator ALLARD. Mr. Chairman, I yield my time to Senator 

Domenici. He has got a very important meeting, and my understanding is that he would be next after me, anyhow. I would just 

trade places with him, if that is OK with you. 

Chairman GREGG. Sure. 

Senator DOMENICI. Thank you very much. 

Doctor, first, on the biennial budget and the biennial appropriation, I thank you for your comments regarding my understanding 

of it. And I might just say it is being introduced today, bipartisan, 

and has a much broader base of support. And whether it achieves 

what we are looking for here today or not, it seems to me to make 

an inordinate amount of sense from the standpoint of letting both 

the Executive and Congress have more time to do something other 

than just appropriating and budgeting. 

Having said that, Mr. Chairman, I look out there, and, you know, 

we do not have to do a whole lot of studying as to what is the longterm problem in terms of getting our fiscal house in order. Clearly, 

we have overpromised both in Social Security and in health care 

commitments, and both, depending upon time, both cannot be sustained in their current form indefinitely. The one that will bring 

about a breakdown sooner will be health commitments. 

I have been asking the question in my own mind: Will we be able 

to solve the problem, that is, make the policy decisions, in a timely 

manner? Or will we in America await a failure, a major failure in 

the health delivery system before we do anything? 

I will ask you two questions. One, am I correct in my assessment 

of the major components of fiscal—of current policy that we cannot 

fulfill that will, if we try to fulfill it, cause fiscal policy decay? And, 

second, how do you think we could solve the health care problem 

policy-wise without waiting for a crash? 

Mr. GREENSPAN. There is no question that the overwhelming 

problem confronting the fiscal situation in the years ahead is 

health care. Social Security is a problem, and it will have to be 

solved—even though nobody wants to solve it because it does require either an increase in taxes or a reduction in benefits, it is the 

only way it is going to happen to bring the actual system into balance. But it is a small issue compared to Medicare, largely because 

of the huge uncertainty about what the overall outlook is. 

Here I think there are several strains currently in play which I 

trust will work to our benefit. One is the fairly dramatic increase 

in information technology which is moving into the health care 

area. It is remarkable that physicians are like everybody else: They 

resist this type of thing. I may even say it is true of economists as 

well; A lot of us resist these newer technologies. Younger economists do not; younger physicians do not. But until you get a global 

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cipient, for example, of Medicare and Medicaid and have a full history, you will not truly be able to cut through one of the very critical issues of uncertain cost. When surveys are taken, we find that 

medical practice in the United States differs region by region and 

that the actual procedures employed and their outcomes are very 

different. 

If we were to get the information technology fully in play, it 

would readily become apparent which are the clinical best practices 

with respect to a variety of different ailments. That, of course, 

would improve medical care per se. But it is also likely to show the 

way to lower costs without cutting benefits. But at the end of the 

day, I do not see how we can avoid significant curtailment of benefits currently promised on a per beneficiary basis, especially as we 

multiply that number by essentially doubling the numbers of retirees over the next generation. 

Senator DOMENICI. So are you suggesting we might have to 

means test it? Is that what you are suggesting? 

Mr. GREENSPAN. I suspect that is clearly one of the critical issues 

that will be before the Congress because you are going to certainly 

want to protect those with lower income and lesser resources. You 

probably are going to want to have some form of catastrophic insurance. But at the end of the day, numbers of people are going to 

have very large copayments—and probably should. 

Senator DOMENICI. Doctor, on Social Security, you said it is a 

smaller problem. The fact that it is a smaller problem does not 

mean we ought not fix it. It seems to me if it is a smaller problem, 

we ought to fix it now. 

Mr. GREENSPAN. I thought that it was a smaller problem, could 

be fixed now, and could be fixed quickly. I was mistaken. 

Senator DOMENICI. Thank you. 

Chairman GREGG. Senator Corzine. 

Senator CORZINE. Thank you, Mr. Chairman. And welcome, 

Chairman Greenspan. 

I thought I had heard some suggestions toward the Social Security discussion that we are having. First of all, I think I heard you 

say that you think it ought to be taken off budget in your remarks 

that you——

Mr. GREENSPAN. Well, it is legally off budget, but we do not behave that way. 

Senator CORZINE. But we ought to manage it as if it is off budget 

on a stand-alone basis so that the trust fund resources would stand 

on their own and not be mixed, OK. And then I thought I heard 

you say it will have to be solved in one of two ways or a combination: increase in taxes or reduction of benefits. Is that correct? 

Mr. GREENSPAN. That is correct, Senator. 

Senator CORZINE. I will leave the unmentioned portion to whatever one wants to draw their conclusion on. 

Let me ask, you said accruals would have given us a greater ability to analyze and understand where we stood. In 2001, if we were 

using accrual accounting, would have we believed that we were in 

such an ongoing surplus situation that we could have committed to 

such long-term tax programs, setting aside the issue of triggers, 

which I think is an important concept, but would we have drawn 

the same conclusion if we had used accrual accounting, since we 

39

had all these contingent liabilities we knew existed, just did not 

bother to factor them into what we were doing. 

Mr. GREENSPAN. In 2001, on an accrued basis, the Federal budget would have been in deficit. Indeed, projecting it forward in the 

years from 2001, it would have remained in deficit. Indeed, at certain points it would be enlarging the deficit, as indeed we see in 

observing the path of so-called contingent liabilities, which are rising, which is another way of saying what the difference is between 

the outlays and the aggregate accrued requirements. 

Senator CORZINE. Might have led to a different framing of the debate than what we had, or at least brought more caution to the debate. 

Mr. GREENSPAN. I suspect so. 

Senator CORZINE. I actually agree that procedures and process 

have a lot to do with outcomes. Triggers, which I am not particularly keen on—and I will admit that—I think actually would have 

been a good thing. But PAYGO rules clearly worked to some large 

degree in the 1990’s to their expiration. 

Do you think PAYGO rules should include both tax and spending 

decisions? 

Mr. GREENSPAN. I do, Senator. 

Senator CORZINE. It is extremely difficult, at least where I come 

from, when you look at budgets where you do not talk about revenues and expenditures. And so I hope that if we are serious about 

PAYGO rules we are dealing both with spending and revenues as 

we go forward. I think I heard you support that. 

If we had had a trigger included in 2001, which you advocated, 

have you done any of the playing out of what those triggers would 

have done in the current environment with regard to the change 

in circumstances, and they are quite substantial, obviously. September 11th occurred, and lots of other things happen in life that 

are unpredictable. 

What kinds of policy changes would have occurred if we had had 

those triggers in place, as you had contemplated and recommended? 

Mr. GREENSPAN. Well, actually, in the period since then, perhaps 

the more important issue of altering policy was PAYGO, because 

even before PAYGO was allowed to lapse in 2002, we had extraordinarily large numbers of endeavors to get around it, and there 

were more unusual emergencies declared by Government than I 

ever thought existed. 

So PAYGO was effectively lost a couple of years earlier, but prior 

to then it was quite effective. Had it been in place and adhered to 

throughout that period, I think we would be in much better shape 

now. 

The trigger issue gets to the longer term and to the question of 

programmatic analysis of budget programs going forward. It is very 

clear that the record of forecast implicit in the preambles of most 

acts is notoriously poor, and that the biases invariably are on the 

up side, both with respect to taxes and spending. The result is that 

because of that bias, one has to presume that the trigger should 

have taken effect after a while in the adjustment process of what 

the actual expected costs were, and one presumably would get different results. 

40

So that the issue here is if you have a trigger, even if you do not 

do that, there is a certain whistle-blowing process. Essentially, it 

says that to the extent that Senators and Members of the House 

of Representatives voted for a bill on the basis or the presumption 

of certain costs going forward and that turned out to be wrong, 

then one might well presume that a number of people would like 

to change their votes or, if it is a generation later in the equivalent 

state, would look differently upon the particular program. 

We have no mechanism to do that, and because of the implicit 

bias in the system of evaluation of program costs——

Senator CORZINE. Program and tax. 

Mr. GREENSPAN. Yes. 

Senator CORZINE. Tax programs as well spending programs. 

Mr. GREENSPAN. Correct, yes. Because of that particular bias, we 

are biasing the long-term outlook, and one should basically ask—

I know you cannot do this in a vote, but say you vote in the Senate 

for a bill—you should ask the Senators, Is your vote contingent on 

the projection of the cost of what this program is? And if you want 

it to have a full exam, you could ask, What are your tolerable limits as to how you would look at it. 

Senator CORZINE. Sunsets are a way to do that as well. 

Thank you. 

Chairman GREGG. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman, and welcome, Chairman Greenspan. I value your expertise and your comments. 

I support the chairman of this committee in trying to put in some 

budget enforcement provisions. I think one of the potentially most 

effective budget enforcement provision we could have is a balanced 

budget amendment. Personally, I have supported a balanced budget amendment with the exception of war. And I think perhaps in 

today’s environment we need to look at that. I am thinking that 

perhaps maybe we could have a balanced budget amendment except in cases of a major international conflict. 

I would like to hear your comments on the balanced budget 

amendment as to whether its time has come and gone, and what 

your views might be on what would be appropriate exception language in a balanced budget amendment. 

Mr. GREENSPAN. Well, Senator Alexander was raising the issue 

of what the States are involved with the obvious impact of what 

a balanced budget does. The real issue you are going to have to 

confront is what you do with entitlements. Let’s take, for example, 

the commitments that are currently made, and assume at the moment we have a budget balance. If you project forward with the demographic changes that we are envisaging, you are going to run 

into a very significant widening of the deficit. The question is: 

What is the enforcement mechanism which then requires you to go 

back to the application of the balanced budget statute? 

It is one of many ways to come at the fact that we have, in fact, 

committed more than we have promised and committed more than 

we almost surely can deliver in the future. It is another way of saying that the budget deficit is going to open up inexorably. Having 

a balanced budget amendment without specifying how you get back 

to that—in other words, what budgetary procedures—risks a very 

serious breach in how Congress would behave. It is conceivable to 

41

me that you could have on the books a balanced budget amendment and an inability of both Houses to come to a conclusion on 

which programs they would change in order to restore balance as 

it moves away. 

So I am strongly in favor of any mechanism which will enforce 

this type of operation. But the mere passage of a balanced budget 

amendment in itself will not solve this particular problem unless 

it has elements which suggest how that particular balance will be 

achieved if you go off. In other words, if it is a balanced budget 

amendment to the Constitution, that is all it would say. But you 

would have to have specific ways in which the Congress is directed 

under statute to confront particular problems as they arose and adjust them. 

Senator ALLARD. Thank you for your comment. I want to move 

on to the value of the dollar. Milt Friedman, a well-known economist, I think, to both of us, always felt that—if I remember correctly, his position was that you do not mess with the value of the 

dollar. It is a commodity out there. It floats in the international 

market. It is beyond our borders and very difficult to control. And 

that if you start messing with the dollar value, then you start leading to policies that lead to trade restriction, and that is not good 

for our economy. 

And we now have a situation where China has apparently tied 

the value of its currency to the value of the dollar. Would you comment a little bit on the value of the dollar? I know it has helped 

our manufacturing sector in ways in which now because it is lower, 

goods are less expensive overseas, but yet I know there is some 

concern about the value of the dollar and the impact on the economy. I wonder if you could comment on that. 

Mr. GREENSPAN. Well, I think the first issue is that fixing the 

RMB to the dollar is beginning to significantly work to the detriment of the Chinese economy. There is no question that two 

things are happening. One is in order to sustain the value of the 

RMB relative to the dollar, the Chinese have been purchasing, as 

you know, very significant amounts of U.S. Treasury issues. In so 

doing, in order to prevent an inflationary money supply increase, 

they sterilize the purchase of foreign reserves, which are a reserve 

base for the expansion of the money supply. They do that by selling 

bank issues, bank liabilities, denominated in their domestic currency. So long as they do that, that tends to prevent purchases of 

foreign reserves from expanding the money supply. 

However, because there are interest rate caps in China, they are 

finding some difficulty in selling an adequate amount of domestic 

currency-denominated debt to absorb the excess, and that is creating imbalances, which suggests sooner rather than later that 

they are going to have to, for stability purposes, move their currency. 

Second, they are also, by holding their exchange rate down, creating a misallocation of resources in China by subsidizing the capital stock associated with very large numbers of workers. Because 

their concern is very clearly stability—that they are worried about 

large levels of unemployment—they are emphasizing the capital 

stock which is of lower technological state and, therefore, employs 

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ards of living from rising because their intellectual technical capabilities are rising. If the exchange rate began to rise, they would 

start to move capital into more efficient types of uses, which essentially would mean that output per hour would rise, which is what 

you would expect when you get an increase in the amount of capital stock per worker. Holding their exchange rate where they are 

is preventing the growth in the terms that will be most valuable 

for China in the decades ahead. 

As far as I am concerned, it is very much in their interest to 

move, and as you can well imagine, we in the U.S. Government 

have been in conversations with them to indicate that, in our judgment and in our experience, they should be moving sooner rather 

than later. There is also debate going on within China on this 

issue. I have no way of projecting when they will move. That they 

will move I am reasonably certain. 

Senator ALLARD. And so your bottom line is that you think they 

are headed for trouble with their current policies and they will pay 

the price in the future. 

Mr. GREENSPAN. The sooner they move off this fix, the better off 

for China’s economy. 

Chairman GREGG. Senator Nelson. 

Senator NELSON. Welcome, Chairman Greenspan. I agree with 

you that the balanced budget amendment might be one component 

for us to address the problem, and it has been frustrating that the 

budget has been employed as a tool more than a fiscal document, 

a political document, even to the point that major things are left 

out. We are, as we speak, dealing with an emergency supplemental, 

and those all have their effects because it is billions and billions 

of dollars. The likelihood that we will address fixing the alternate 

minimum tax problem is not even a part of the budget. 

And so to enforce this discipline, you said that the balanced 

budget amendment might be one component that we could employ. 

But you said we need to specify elements in it of how Congress 

would address the imbalance. 

Can you elaborate, please? 

Mr. GREENSPAN. Well, as I said before, Senator, if we put in the 

Constitution a balanced budget amendment and left it at that, then 

the question is up to the Congress to adhere to that. Since the demographics going forward almost certainly indicate that we will be 

moving toward deficits, there is the danger that there will not be 

majorities in both Houses of the Congress to come up with a contraction in the deficit as required by the Constitution. That would 

be a very, very difficult political issue for this country. 

Therefore, if you move in the direction of a balanced budget 

amendment, you have to have in place default mechanisms that 

will actually do what is required to adhere to the law. It is by no 

means certain that in all cases you are going to get actions by both 

Houses of the Congress, including the signature by the President, 

which will adhere to the Constitution. Therefore, a balanced budget 

amendment to the Constitution will not in and of itself solve the 

problem. 

If it is part of a much broader program which comes to grips with 

the chronic movement toward increasing deficits, then I think you 

obviously look at it as you do other things. But it may very well 

43

turn out that if you do all the things that are required to adhere 

to the balanced budget amendment, you do not need the balanced 

budget amendment. 

Senator NELSON. Is part of that broader program that we ought 

to rethink the entire Budget Act? It started out in the 1970’s as 

a means of fiscal discipline to lower deficits. And then it was employed a few years ago as a means by which to lower taxes, which 

contributed to the huge deficits that we have now. What is your 

thinking there? 

Mr. GREENSPAN. Well, if PAYGO were in place all through this 

period, you would not have had the types of problems to which you 

are referring. I cannot say whether going back to the Budget Enforcement Act and revising it is going to solve a great deal. But I 

do think it is crucial for the Senate, and specifically this committee, 

to think through what has to be done, and it is hard to find a group 

more knowledgeable about how the American system works than 

this committee. After you have reached a conclusion, then you can 

define what statute is required to implement the policy. But just 

putting the Budget Act on the table and starting to play with it is 

not going to get you there. You have to decide how you are going 

to come to grips with the fundamental issue which was raised in 

this hearing. If you have promised more than we have, you are 

going to have to take back some of the things you have promised, 

and there is no way of getting around that conclusion. 

Senator NELSON. I see the red light is on, Mr. Chairman. I was 

just curious to find out what in the world are you going to do about 

rates. You raise the rates, you cause the economy to start slowing 

down. Are we headed to stagflation again? 

Mr. GREENSPAN. It certainly does not seem that way, Senator. 

Chairman GREGG. Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman, and, 

Chairman Greenspan, I appreciate your attendance yet again at 

one of these important hearings where we discuss these issues. 

I want to go first to the question of balancing the budget, and 

it seems to me that it is pretty obvious that there are two broad 

solutions: one is we can reduce spending; the other is we can increase revenue. And there are different ways to increase revenue. 

You can try to stimulate the economy, or you can just raise taxes. 

There are some who argue very strongly around here that we do 

not need to control the size of Government as much as we need to 

just try to increase revenue by increasing taxes to match the level 

of our spending. And many of them attribute the deficit or large 

portions of the deficit to the President’s tax cuts of a few years ago 

and argue that we should allow those tax cuts to expire. 

The CBO has done a long-term projection in that context, and 

based on their projections, assuming that the growth in Medicare 

and Medicaid continues at its past rates and that the real bracket 

creep in the AMT continues and if we allow the tax cuts to expire, 

which would cause total revenues to reach 24.7 percent of GDP in 

2050, assuming that we just allow the tax cuts to expire but did 

not address the entitlement spending and the other aspects of the 

growth of Government, we are still unable to balance the budget. 

And the reason, as I understand it, is that we are not in that sceVerDate 0ct 09 2002 09:45 Nov 21, 2005 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6601 C:\DOCS\22429.TXT TISH PsN: LAF
44

nario getting a handle on entitlement reform, which we have discussed a lot here today. 

Would you agree that unless Congress begins to reduce entitlement spending, the financial future of our Nation is in jeopardy? 

Mr. GREENSPAN. I have testified that we are currently committed 

to making outlays in the next decade, which is on a slope of advance, much larger than we can afford. 

We can raise taxes, and I don’t deny we probably at the end of 

the day will do that in order to get an ultimate resolution of this. 

But as I have said many times before this committee, as you raise 

taxes you reduce the rate of growth in the economy and, hence, the 

revenue base itself. As a consequence, you do not get a one-to-one 

revenue increase. At the end of the day, if you raise taxes high 

enough, you will find you have not increased revenues at all. And 

the deficit is still there because the spending is still there. 

Senator CRAPO. Well, you may have already answered my followon question here by what you just said, then, because CBO’s analysis indicates that under the scenario that they were analyzing, the 

effective marginal tax rate would rise from 32 percent to 40 percent. And the question I need to ask you is: What impact would 

that have on our economy and on our ability to generate the revenue necessary to balance the budget? 

Mr. GREENSPAN. Well, as you raise taxes, especially at the margin, you very likely curtail capital investment and the underlying 

economic structure that is required to increase productivity and 

standards of living. So there is a significant dilemma here, namely, 

that in raising revenues, you can create a lower deficit as a consequence of that, but only up to a point; and so I conclude that 

there is no way you can bring tax rates up to the level that would 

be required to generate the revenues which would effectively solve 

the fiscal problem that we now have. From that I conclude that one 

of the significant parts, probably the largest part, of the adjustment is scaling back the promised benefits, say, from the year 2010 

forward. Unless we have a huge increase in immigration, which I 

do not anticipate, we are locked into the arithmetic of what the 

population changes that we are about to experience are going to 

mean. 

Senator CRAPO. Thank you. 

Chairman GREGG. Senator Graham. 

Senator GRAHAM. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for coming. I have some specific questions about Social Security reform efforts, and I will try to be concise and get as much of it in as I can. 

There is a big debate—well, one, we have chosen to talk about 

Social Security because the President has chosen to talk about Social Security. I applaud his efforts to put it on the table. Maybe we 

should do Medicare first, but we are certainly going to do Medicare 

at some point. But when you talk about entitlement reform, whether it is Medicare or Social Security, people mention different time 

periods, whether it is 2017 when we pay out more in benefits than 

we collect in taxes, the estimate by certain people that we will have 

a benefit cut coming in 2041, others 2050. You said something to 

me privately that sort of struck me. 

45

Your belief—and I do not want to put words in your mouth—is 

that if we do not start the reform process before the baby boomers 

slip into the retirement systems, it is too late. Could you expound 

on that. 

Mr. GREENSPAN. Well, I do not know whether I said it was too 

late, but if you wait you are going to have to start to adjust benefits to groups of people who are already retired, and that is not 

fair. And it is, in fact, extremely difficult to do politically, obviously. 

Since we are going to have a significant number of people starting to retire in 2008——

Senator GRAHAM. Right. 

Mr. GREENSPAN. Remember, half the people eligible to retire at 

age 62, and once you have started down the road, it is very difficult 

to start to change. So, in my judgment, it is far easier to come to 

grips with these issues before the baby-boom generation starts to 

retire in large numbers. 

Senator GRAHAM. And that process begins in 2008. Is that correct? 

Mr. GREENSPAN. Yes, sir. 

Senator GRAHAM. Now, solvency. We have talked a lot about personal accounts, but I would like to talk with you a moment about 

the solvency aspect of Social Security. In present dollars, it is about 

$3.7 trillion underfunded, short of the money to meet the promises. 

There is a concept floating around called index changes that if you 

went away from wage growth in terms of calculating your basic 

benefit to inflation, that that change alone with substantially bring 

about solvency. 

Do you agree with that? Would you like to comment on that? 

Mr. GREENSPAN. Well, actually it does. Current law takes the average of approximately a 40-percent replacement rate of Social Security, meaning the level of retirement benefits as a ratio to the 

wage income that one experienced just before retirement. 

Shifting from wage indexing, which is currently in law, to price 

indexing will bring the replacement rate down quite significantly 

in the process. 

I should add, however, that that replacement rate is going to 

come down in any event. It almost is built into the demographics 

that we are now looking at, so it is not as though we have the possibility of maintaining the 40-percent replacement rate. We can do 

so only by raising taxes at an inordinate level, as I was discussing 

with Senator Crapo. So the issue is, yes, that action in and of itself removes the $3.7 

trillion, which is the present cost of the shortfall through the year 

2075. 

Senator GRAHAM. And if I may go a step further—and if you do 

not want to answer this, I totally understand. 

Mr. GREENSPAN. I am sorry, 2080. 

Senator GRAHAM. Would you recommend such a change? 

Mr. GREENSPAN. I think that some such structure, if you are 

going to come to grips with this issue, is obviously on the table. But 

it is up to the Congress to decide which particular variation of a 

whole series of potential ways of solving this problem should be 

employed. 

46

Senator GRAHAM. Are you familiar with longevity indexing? 

Mr. GREENSPAN. In the sense of making eligibility a function of 

longevity, life expectancy after age 65? 

Senator GRAHAM. Yes, sir. 

Mr. GREENSPAN. I am. 

Senator GRAHAM. Would you recommend that change? Do you 

think that would be helpful? 

Mr. GREENSPAN. I have always advocated that on the grounds 

that to have a stable system like Social Security, you are going to 

need to have the number of years in retirement as a ratio to the 

number of years working stable. 

Senator GRAHAM. Mr. Chairman, have I used my time? 

Chairman GREGG. You sure have. 

Senator GRAHAM. OK. Well, I apologize. 

[Laughter.] 

Chairman GREGG. But brilliantly, brilliantly. 

Senator GRAHAM. OK. Well, I had a few more questions, but we 

will do it next time. 

Chairman GREGG. Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. Thank you for 

being here, Chairman Greenspan. 

The report the Fed released yesterday indicated that energy 

prices were having an impact on inflation. How important is it to 

our economy that our country develop a strong energy policy? 

Mr. GREENSPAN. Well, Senator, it is a fact that the significant 

rise in the prices of gasoline and home heating oil as a consequence 

of the big rise in crude oil prices are significant components in the 

Consumer Price Index. Indeed, just looking at the level of prices, 

you can see the mirror image of these prices going up. 

The problem that we have is we do not produce enough energy 

ourselves. We actually produce more than most countries in the 

world, but we still import, as you know, well over half, close to twothirds, of our petroleum requirements. 

Unless we find a means to consume very significantly less or 

produce significantly more, we are going to remain dependent on 

others to ship oil to this country to meet the demands that are part 

of our infrastructure. 

Senator BUNNING. Well, we also are in a world economy now that 

other countries are competing and driving up the price of crude oil 

not only from the Middle East but other area. China’s consumption 

of crude oil now has exploded. Ours has exploded from when we 

had our first oil boycott until the present time where 60 percent 

of all our crude is not domestically produced. 

But an overall energy policy would give us some guidance if we 

had an overall energy policy. By that I mean there has got to be 

alternatives to the current use of just crude oil to produce power, 

energy, drive cars, do everything that we use energy for. 

Mr. GREENSPAN. Well, there certainly is, Senator. Clearly, we 

could run electric power from nuclear plants, which, are still a fraction of the aggregate electric power we employ. 

There are a number of technologies out there—hydrogen fuel 

cells and a number of so-called exotic technologies. There may, 

however, be more in the way of exploiting natural gas possibilities 

in the sense that there is an awful lot of what we call natural gas 

47

hydrates out there. We have in the United States huge reserves, 

which is sort of a methane that is encased in ice crystals, and 

which we are now only beginning to look at. 

If we are capable of creating a significant increase in output from 

that source and the so-called newer technology of what they call 

gas-to-oil conversion, which is actually taking gas and putting it 

into a liquid form, it is conceivable we may find many years down 

the road significant alternate sources of types of fuel which we use 

today. 

Senator BUNNING. But you are not disagreeing with me that we 

need an overall energy policy? 

Mr. GREENSPAN. I think that we better have one, because it is 

something which is integrated not only into our economic system, 

but into our national security systems as well. 

Senator BUNNING. I agree. The last question. As an economist, 

can you comment on dynamic scoring? Do you agree with the President’s Council of Economic Advisers that using dynamic scoring 

shows the true cost of a capital gain tax cut to be about half of the 

costs reflected by static models? 

Mr. GREENSPAN. Well, in principle, Senator, there is no question 

about the value of having full-blown models that evaluate not only 

the initial impact of a spending or tax program, but the secondary 

impacts as well. These impacts create, for example, changes in economic activity, revenues, and the net effect at the end of the day 

is different from static scoring, which, by definition, only endeavors 

to capture the initial effect. 

The trouble is that the nature of the dynamic scoring process 

rests very considerably on the specific structure of the model that 

is employed. 

We economists build models and explicitly indicate they are a 

very large abstraction of the real world with which we deal. If we 

all agreed on a single model, then dynamic scoring would unquestionably be the right way to evaluate all sorts of programs. But we 

have been unable to do that, and so we have all fallen back to static scoring, which is admittedly second best. Unless we can find 

agreement on which types of models to employ, you cannot get the 

staffs of these committees here and in the House and elsewhere to 

agree on what the results are. So that is the problem. It is not the 

issue of whether dynamic scoring is better than static scoring. It 

clearly is. 

Senator BUNNING. Thank you, Mr. Chairman. Thank you. 

Chairman GREGG. Mr. Chairman, you have been very generous 

with your time. I know Senator Conrad had an additional question 

and Senator Graham had an additional question. I appreciate your 

generosity with your time. Do you need to head off? 

Mr. GREENSPAN. No. I can stay for a short while longer if you 

would like me to. 

Chairman GREGG. Well, why don’t we go with one question from 

Senator Conrad, one question from Senator Graham, and I just 

have a simple question, which is: Why have we lost comparative 

advantage as a concept of why we are working as a Nation? But 

we will start with Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

48

I go back to this chart that shows for a very long period of time 

the relationship between spending and revenue. And spending now 

is lower than it was through the 1980’s as a share of GDP, through 

a good chunk of the 1990’s as well. It is the revenue side of the 

equation that has really fallen out on us, and although we see some 

uptick, the projections going forward still leave us with this enormous gap.

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And I agree with you, longer term the entitlements have to be 

dealt with. I do not see it happening without a mix of spending and 

revenue. This revenue last year is the lowest since 1959 as a share 

of GDP. 

When we look at revenue, I have been saying to my colleagues, 

before we talk about any tax increase to get additional revenue, we 

ought to focus like a laser on the tax gap. The tax gap, the Revenue 

Service now tells us, is over $330 billion for 2001. I believe, based 

on my experience, that that tax gap is very significantly understated. 

Mr. GREENSPAN. I am sorry. Are you referring to the fact of what 

we do not collect? 

Senator CONRAD. Yes. 

Mr. GREENSPAN. OK. 

Senator CONRAD. The difference, the tax gap being the difference 

between what is owed and what is being paid. And while the vast 

majority of Americans pay what they owe, the vast majority of companies pay what they owe, there are some who do not. And that 

amount of money has grown very significantly. And you know well 

the schemes that are out there across America to dodge taxes. 

Every kind of aggressive accounting move that people have conjured up over the years is in play. I have friends that are in major 

accounting firms. They tell me the culture has changed. And the 

Revenue Service’s numbers show that this tax gap has grown significantly. 

This is not going to happen just on the spending side of the equation. It is just not. I personally believe that most of the adjustment 

or a very significant part is going to have to occur on the spending 

side because the numbers do not lie. The number of people eligible 

for Social Security and Medicare is going to grow dramatically, and 

it would not be good for the economy to do this all on the revenue 

side of the equation. I do not think it could be done all on the revenue side. That argues, as you have argued here this morning very 

clearly, much of this must be done on the spending side. 

But I also believe there are not going to be any agreements 

around here unless the revenue side of the equation is also addressed. And I believe the first place we ought to look is this tax 

gap. 

Would you comment on that basic notion? 

Mr. GREENSPAN. Senator, I have a firm belief that all legal obligations need to be paid, and enforcement is required to sustain the 

law. Part of the problem, obviously, is there is sometimes lack of 

clarity in what the legal obligations are, and this is where you get 

this sort of vague notion between tax avoidance and tax evasion. 

That legal line is not drawn as sharply as it should be. 

But there is no question in my mind that if it is a legal obligation, the law needs to be enforced. 

Chairman GREGG. Senator Graham for one question. 

Senator GRAHAM. Thank you. It goes to the personal account debate about Social Security. It is my understanding that you support 

the concept of personal accounts for a portion of FICA taxes for 

younger workers. Is that correct? 

Mr. GREENSPAN. I do, Senator. 

51

Senator GRAHAM. I have been told that people born after 1980 as 

a group receive about a 1.4-percent rate of return on their FICA 

taxes. Is that fairly accurate, do you think? 

Mr. GREENSPAN. I do not have the specific numbers, but I have 

no reason to doubt your numbers. 

Senator GRAHAM. So is it your firm belief that as a Nation we could take, let’s say, a $1,000 account, structure it correctly, get a 

better rate of return than 1.4 percent? You feel like that is a very—

is that doable? 

Mr. GREENSPAN. Well, it is a tricky question as to what rates of 

return are because you can very clearly increase the rate of return 

on Social Security or, by carve-outs, the rate of return on a private 

account. But you have to be careful that in the process you do not 

also reduce the rates of return on other private sources of retirement. So there is a tricky question here which often gets pushed 

aside. 

Senator GRAHAM. Well, I will be glad to talk to you about how 

to accommodate that. One of the down sides of the account, in my 

opinion, is the effect that setting the accounts up would have on 

the deficit. I have asked the following question, that if you made 

the tax cuts permanent with AMT relief, and if you borrowed the 

transition cost of a personal account plan like I have proposed, 

$1,300, the deficits in 2014 would be about $650 billion; that if you 

made the tax cuts permanent that we propose to do, and if you borrowed the money to set up an account of $1,300, the deficit in 2014 

would be $650 billion. 

If that is true, what effect do you think that would have on the 

economy? 

Mr. GREENSPAN. The problem here is that most unified budget 

analysis is pretty clear-cut. When you have an appropriation and 

spend money or cut taxes, you borrow and you spend. So it is fairly 

clear what the change in resources are in the United States. 

When you essentially borrow for a carve-out, you have effectively 

a forced saving account, which essentially says that the amount of 

debt that is issued by the Treasury is offset by a demand of an 

equivalent amount—and one would think that that should be a 

wash in the marketplace. So in an accounting sense and saving 

sense, it does not affect national savings. But what we are not clear 

on is whether the financial markets read the increase in marketable debt by the Federal Government as a wash and, hence, not an 

issue of concern. 

If I were convinced that the financial markets would look at 

those increased elements of the Federal debt as being essentially 

offset by private savings and, hence, not respond in driving interest 

rates up, then I would be very comfortable with the issue. 

My problem is I really do not know how they are going to behave. One of the reasons I have argued to do this type of account 

very gradually and in very small amounts is you would be able to 

judge whether, in fact, there is a market effect here from a system 

which does not effectively change national savings. 

Senator GRAHAM. One last question——

Chairman GREGG. I thank the Senator. No, I am afraid we are 

going to have to move. 

Senator GRAHAM. OK. 

52

Chairman GREGG. Senator Sarbanes, I think you have the last 

5 minutes here. 

Senator SARBANES. Well, thank you. Thank you very much, 

Chairman Gregg, and, Chairman Greenspan, I am pleased to welcome you to the committee. 

In a somewhat lighthearted fashion, I sometimes read editorial 

cartoons that appear in the newspaper. Sometimes they seem to 

make a point and make it very well, and this morning I am going 

to cite the one by Tom Toles in the Washington Post that appeared 

last month. It shows you reading a book entitled ‘‘The Independent 

Fed’’ by G.W. Bush. And then the quote from the book says, ‘‘...but 

then without warning, after the tax cuts solved the surplus problem, massive deficits somehow appeared. We must address these, 

I’ve concluded, by reforming Social Security right now, with private 

accounts, as it happens...’’. 

Now, I don’t know what the book went on to say from there, but 

I use that to set the context for the question I want to put to you. 

You say in your statement this morning, ‘‘Our ability to rein in deficit-expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. Thus, policymakers need to 

err on the side of prudence when considering new budget initiatives. Programs can always be expanded in the future should the 

resources for them become available, but they cannot be easily curtailed if resources later fall short of commitments.’’

And I take it when you make reference to budget initiatives, you 

are talking about tax cut initiatives as well as spending program 

initiatives. Would that be correct? 

Mr. GREENSPAN. That is correct, Senator. 

Senator SARBANES. Now, that, of course, raises the question 

about how prudent the advice was that we were given in January 

of 2001 when the prime issue before us was the Bush tax cuts. You 

said then, ‘‘The time has come, in my judgment, to consider a budgetary strategy that is consistent with a preemptive smoothing of 

the glide path to zero Federal debt or, more realistically, to the 

level of Federal debt that is an effective, irreducible minimum.’’

And I said to you at the time that it would not be far off the 

mark for the press to carry the story on the basis of your testimony 

that morning, ‘‘Greenspan takes lid off of punch bowl,’’ because 

your position in the past has consistently been that the surpluses 

should be devoted to reducing the debt. When drawn into, the question of wheteher we should have tax cuts or spending increases, 

you have generally remained out of that debate, although you have 

indicated a preference for tax cuts ahead of spending increases. But 

that was not really relevant because your first line was always to 

reduce the deficits. 

And so the question I put to you is: Didn’t the Bush tax cuts of 

2001 and 2003 fail the test of prudence that you set out this morning in your statement when considering new budget initiatives? 

Mr. GREENSPAN. Well, Senator, let me answer you by expounding 

on what else I said in 2001 at the same hearing. Everybody at that 

particular point in time was forecasting very significant surpluses 

as far as the eye could see. Indeed, all of the technicians who knew 

most about the issue of revenue estimation and budget estimation 

were coming up with significant surpluses. 

53

If you literally believed what they were saying—and I checked 

very closely with all of the technicians in our operations and elsewhere—there is no way you can get around this question unless 

you make several different assumptions. 

If that is indeed the case and we run policy on the basis of information, then what we would be looking at there was a very dramatic decline in the level of debt, which would have come to effectively zero. This would have required, in order not to reverse fiscal 

policy dramatically, a huge increase in private assets held by the 

Federal Government, which for reasons I outlined at the time, I 

thought was a very undesirable policy. 

So I advocated tax cuts, but I also advocated triggers in the same 

testimony. The testimony essentially indicated that if indeed, despite all of the optimism with respect to the levels of surplus, it did 

not turn out that way, we needed a mechanism to reverse course. 

And the failure to reverse course has not only been the result of 

an issue of the trigger, it has also been the result of allowing 

PAYGO to dissipate and finally be eliminated in September 2002. 

So it is the case that I did believe that the forecasts of surpluses 

were real and, indeed, the Federal Reserve embarked upon a very 

extensive program to determine how we would operate Federal 

open market policy, the policy of purchases and sales of U.S. Government securities, when the level was disappearing. So it was not 

an issue of just the forecast that did not mean anything. We took 

action on the basis of that forecast, and all I am saying is we were 

wrong on that forecast. But I did say that were we wrong—and this 

is in the same testimony which you are citing—we should have a 

mechanism to deal with it. 

Senator SARBANES. I recall it was at the end. 

Mr. GREENSPAN. That is correct. 

Senator SARBANES. But it came at the end, once the punch bowl 

lid was off. Paul O’Neill——

Mr. GREENSPAN. But let me say, the question is: Is the statement 

about the punch bowl accurate? In other words, reading the flow 

of testimony, there is a question not only of whether somebody said 

the punch bowl lidwas being taken off. The issue is: Is that an appropriate evaluation of the full testimony? Unless you say that people only heard half of what I said. 

Senator SARBANES. Well, given the dynamic of the process in the 

Congress, which, after all, you are quite familiar with——

Mr. GREENSPAN. Partly. 

Senator SARBANES [continuing]. It seems to me that giving any 

sort of green light to tax cuts—or spending increases, for that matter, if you are concerned about the deficit problem and the reduction of the debt—is a very tricky proposition. 

Mr. GREENSPAN. Senator, the same——

Senator SARBANES. And the consequence, of course, is that we 

have now gone deeply into deficit and deeply into debt with no 

prospect of working out of it. 

Mr. GREENSPAN. Yes, but, Senator——

Senator SARBANES. As one looks ahead. 

Mr. GREENSPAN. As you remember certainly as well as I, first of 

all, I did not support a specific tax cut. People assumed that I did, 

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ported a specific tax cut. Indeed, the Democratic leadership tax cut 

would have solved the problem that I was raising with respect to 

reducing the level of the debt outstanding too quickly. If you look 

at the combination of both the President’s program and the Democratic leadership program, including spending, you would be hard 

pressed to find really significant differences about the reduction in 

the issue of debt outstanding. 

So there is a question of context back there, and I will admit that 

I was wrong, like everybody else, on the issue of surpluses. But I 

think it is, frankly, unfair to read half of my testimony and discard 

the remainder. 

Chairman GREGG. Well, with that bit of——

Senator SARBANES. I think what is fair——

Chairman GREGG. Senator, Senator. 

Senator SARBANES. I will just close with this observation, Mr. 

Chairman. I think what is fair is to consider how your message 

would be taken, and it clearly was taken the way I have suggested 

in terms of providing a green light. I can put together——

Mr. GREENSPAN. I plead guilty to that. If indeed that is the way 

it was interpreted, I missed it. In other words, I did not intend it 

that way, and that certainly, if that was indeed the case, was not 

my intention. 

Chairman GREGG. I would just submit for the record there are 

those of us who think that moving forward with the tax cuts was 

good policy, and we think we can defend that policy with the economic recovery that has occurred and the shallowness of the recession which resulted as a result of those tax cuts. 

But that is history. We are trying to look forward here. And we 

appreciate your advice as to how we should look forward at what 

are the big issues coming out, which specifically are the entitlement accounts and health care. And the advice and guidance you 

have given us today I am hopeful we can convert to some specific 

legislative language. So thank you, Mr. Chairman, for your time. 

Mr. GREENSPAN. Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Greenspan follows:]

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Chairman GREGG. The hearing is adjourned. 

[Whereupon, at 12:05 p.m., the committee was adjourned.]

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SOLVENCY OF THE PENSION BENEFIT GUARANTY CORPORATION - CURRENT FINANCIAL 

CONDITION AND POTENTIAL RISKS 

WEDNESDAY, JUNE 15, 2005

UNITED STATES SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, D.C. 

The committee met, pursuant to notice, at 9:52 a.m., in Room 

SD–608, Dirksen Senate Office Building, Hon. Judd Gregg, chairman of the committee, presiding. 

Present: Senators Gregg, Allard, Enzi, Bunning, Conrad, Murray, 

Byrd, and Stabenow. 

Staff Present: Scott B. Gudes, Majority Staff Director; and Mary 

Ann Naylor, Staff Director. 

OPENING STATEMENT OF CHAIRMAN JUDD GREGG 

Chairman GREGG. Since we have our witnesses and myself and 

Senator Conrad here, I thought we might just as well get started 

because we do have a vote at 10 o’clock, and this way Senator 

Conrad and I can make our statements, go vote, come back, and 

then start with your testimony, if that is agreeable to you folks, 

even though it is a little early by our own standards. But that is 

good. Congress should be early. We are usually late. It is about 

time we were early. 

You will note that we have these big screens. This is an attempt 

to move our committee into the 20th century. We do not expect to 

catch up with the 21st century on technology in this committee. 

But we have felt great solace and concern for the staff of Senator 

Conrad and their need to hold posters and billboards and charts all 

the time. So in order to try to relieve that stress on his staff, we 

have put in these fancy screens and we are going to go electronic. 

My hope actually had been to have these screens like the House 

has. They have quite spectacular video capability in their hearing 

rooms. However, the Senate does not move with such alacrity, and 

so we have this structure here, which hopefully will work. It is 

going to be a test, and I suspect there will be some glitches. But 

Dave is down there working for us, and Senator Conrad has his 

folks down there. So hopefully this will all work out, and we can 

put our charts up in an electronic way. If that does not work, I am 

sure there is some back-up system. 

The hearing today deals with the Pension Benefit Guaranty Corporation, and we are fortunate to have the Executive Director, 

Brad Belt, and the Director of the Congressional Budget Office, Dr. 

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Holtz–Eakin, with us today in order to talk about the issues which 

are confronting us in this area. 

In my opinion, if we look out into the out-years of what our Government is confronting in the area of fiscal issues, we have a major 

crisis looming. We have talked about a lot on this committee, both 

myself and Senator Conrad. The crisis is driven in large part by 

demographics and the entitlement programs which we have created 

within the Government to assist people and to benefit people who 

are retired—obviously, Social Security, Medicare, and Medicaid 

being three of the largest ones. But if we are looking at contingent 

liabilities that are out there, potential liabilities, the PBGC is the 

fourth largest concern for us as a Government after those three 

major entitlements. And that is a function of the fact that we face 

a huge unfunded liability within defined benefit pension funds and 

the PBGC fund, and that is what we are going to talk about today. 

The pension incomes of Americans are dependent on two basic 

sources. One is obviously the public pension system, which is Social 

Security, and for people who are in the lower-income brackets, that 

makes up about 83 percent of their income. You can track Chart 

1 and Chart 2 here. We will see if we can get those up. And the 

second is for people in the middle- and higher-income brackets, private pension benefits—and that would be Chart 2—of which defined benefit plans make up a large amount.

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The number of participants in these programs, which would be 

the next chart, has been rising in the defined benefit plans, which 

are PBGC approved. But the number of plans have actually been 

dropping, which is an interesting fact and something which reflects, I think, the fact that most people, many employers, are moving towards contribution plans versus defined benefit plans. And 

the PBGC is finding that it now has fewer plans to participate in 

their system, which has an impact on their solvency to a significant 

degree.

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The defined benefit insurance program as set up by Congress 30 

years ago is, regrettably, grossly underpriced right now and broken, and that would be the next chart, which is a rather dramatic 

reflection of the fact that we basically do not have enough money 

coming in and we have got a lot of money going out, or potential 

money going out. And the next two charts also reflect this, and so 

let’s move on to those.

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The plans basically are giving people a false sense of security as 

to what they are going to receive in pension benefits because essentially the promises exceed the assets. And as we start to draw 

down assets in these plans, especially if we look at the projected 

drawdown of assets, we see that the insolvency accelerates significantly, and that would be the next chart, so that by 2025 we are 

projecting insolvency of $91 billion in the PBGC.

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This is a huge number, and the problem here is that it is almost 

faster than Social Security, as we understand it. We actually have 

an insolvency right now of $23 billion, and because of the way the 

system works, as we start to draw down assets in the plan to pay 

current liabilities, we end up basically eating the seed corn which 

would theoretically grow the benefits for people in plans trustd by 

the PBGC who are going to retire in later years, which is why this 

accelerates so dramatically, leaving us with a huge out-year problem. 

I would compare it to the savings and loan problem that we had 

in the late 1980s, early 1990s, which brought down the banking industry, especially in the Southwest and in the New England States. 

It is that type of an issue in that, theoretically, at least, the Federal Government is on the line for a whole lot of this. But that is 

only theory, I think. We have to acknowledge the fact that if we 

have this type of a meltdown in our defined benefit structure, 

clearly the Federal Government is going to be drawn into this. People would expect that. 

So what do we do? What do we do? Well, I think there are a 

number of suggestions which we should pursue, and let me just 

read a few of them. 

First, we have to require that we have valid information about 

the security of these benefit plans. We cannot keep misleading people. We really actually have to have more transparency and more 

accuracy as to what these plans’ benefits are, and participants need 

to know that. They need to know if their plan is in jeopardy and 

to what extent it is in jeopardy so that they have that information. 

Workers must be assured that the law does not allow and even 

encourage hollow promises, that we do not have a system where 

employers and union leaders are making and offering rank-and-file 

members benefit increases that cannot possibly be paid for. And 

this has been a huge issue. Promises have been made here in order 

to settle negotiations, which clearly people should have understood 

were not going to be able to be fulfilled, and that continues and it 

should not continue and we should change the law so it cannot 

happen. 

The law must place a tangible price on all defined benefit plans’ 

underfunding to limit the moral hazard of shifting risks to the 

beneficiaries, to PBGC, and other companies paying premiums. Accounting schemes that paper over massive funding shortfalls must 

be outlawed. Interest rate policies and funding targets must be 

straightforward to administer and be consistent with each plan’s liability payouts. 

These are just a few of the things which need to be changed, but 

what we do know is that the PBGC already has a serious deficit 

and a cash crisis looming with a clock that will toll within 20 or 

30 years sooner than when the Social Security problem hits us. 

And so we need to get on this issue. In fact, our window of opportunity is even narrower, in my opinion, than it is with Social Security because of the way this system works and the fact that we will 

be using up assets to pay liabilities, which assets really are not coordinated with those liabilities. 

Under the current law, the remedies for this broken system do 

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ment. I think this is an important point. The PBGC is only authorized to borrow up to $100 million from the U.S. Treasury. This 

amount pales in comparison to the projected shortfalls in the 

amount that would be needed to pay out the current projected levels of insured benefits. If we do nothing, employers left standing 

will pay even higher premiums than we have proposed in the 

Budget Resolution which we passed, and workers and retirees will 

be faced with significant reductions in insured benefits. 

We have got to learn from the history, especially the history of 

the savings and loan crisis, that you cannot wait to act on something like this. The most important thing we should all have to 

learn is that the longer we wait, the costs of the remedy will become higher, and there is another chart that shows the comparison—number 8, I think it is—of this problem to the S&L crisis.

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We are going to hear today that the PBGC deficit is projected to 

be $23 billion. Fortunately, PBGC payments are generally not 

made on a lump-sum basis, unlike withdrawals from a savings and 

loan. Nevertheless, the pension insurance fund will first run short 

on cash in just 5 years, and it will take roughly another 15 years 

to liquidate all remaining assets in the fund, which at that point 

there is nothing left and it is over. There are no more pension benefits. People who have pensions at 15 years out, we will have nothing to pay them if they are in the PBGC system. So that is the crisis we confront. 

But we have the opportunity to get it right, and the Budget Resolution attempted to try to start that process, and what this hearing 

is about today is whether or not the Budget Resolution went far 

enough or went too far and what needs to be done in the area of 

raising premium and in the area of making the increases in premium responsible enough so that we do not force companies to tip 

over into bankruptcy and draw more people into the PBGC. This 

is the conundrum we face, which is that as we try to make the system solvent, we do not want to make more companies insolvent, 

which in the end makes the system less solvent. 

So we appreciate the fact that we have got two expert witnesses 

with us today to talk about this, and at this point I would yield 

to the ranking member, Senator Conrad. 

OPENING STATEMENT OF RANKING MEMBER KENT CONRAD 

Senator CONRAD. Thank you very much, Mr. Chairman, and 

thank you very much for holding this hearing. We have seen an 

outpouring of concern on this issue since the United default. Let’s 

go to that first slide, if we can. 

The Washington Post ran this story on the human toll of a pension default, and they told the story of the family of a young United 

pilot who died in the disaster of September 11th. And that young 

pilot’s widow now faces a cutting in half of her pension benefits because of the United default.

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We know that some 120,000 employees of United are going to absorb the $3.2 billion of that default not covered by the PBGC. 

These are people earning pensions over $45,000 a year, and I know 

myself, I grew up with a young guy in North Dakota, a very dear 

friend who wound up becoming a United pilot after a distinguished 

career in the military. And he was in town just recently and told 

us he has lost a significant majority of his pension benefits. 

That story is repeated over and over in this story that was in the 

Washington Post. Those who were counting on a retirement that 

they thought was assured, certainly one that was promised to 

them, now find the rug pulled out from under them. 

Let’s go to the next slide. We know that PBGC has experienced 

a dramatic reversal of fortunes in recent years. In 2001, PBGC reported a cumulative surplus of $7.7 billion—a surplus. Now we see 

a current PBGC liability of $23 billion, as the chairman indicated, 

growing to an estimated PBGC liability of $91 billion in 20 years. 

That is an incredibly serious matter for all of those who are in danger of having their pension benefits reduced from what they 

thought was assured.

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At that rate, assets in the PBGC fund will have been exhausted, 

and without serious reform PBGC may pay only pennies on the dollar each year to beneficiaries. Director Holtz–Eakin, you have 

warned of the risk to beneficiaries, stating that an insolvent PBGC 

would necessitate a drastic reduction in benefits, perhaps in excess 

of 90 percent. 

Let’s go to the next slide, if we could. The maximum pension insured by the Pension Benefit Guaranty Corporation now is $45,614. 

If that has to be reduced by 90 percent, that would be only coverage of $4,561. Can you imagine the extraordinary hardship that 

would impose on people who, once again, are counting on these 

pension benefits? And, you know, when you have reached retirement age, what are you going to do to catch up? What are you 

going to do to make this all work? That is the very serious threat 

facing people.

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The chairman asked the question: What do we do? That is precisely the question we ought to ask and try to answer. 

One thing we know is that there are things that could be done 

here that make the situation worse. Again, Director Holtz–Eakin, 

you warned the Finance Committee that changes in policy that require augmented pension funding would impose new costs on sponsors, probably increasing the chances for further bankruptcy filings. So the first thing we have got to do is make sure we do no 

harm, that we do not dig this hole deeper.

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As part of this year’s budget resolution—let’s go to the next 

slide—the HELP Committee, which oversees the Pension Benefit 

Guaranty Corporation, must approve savings proposals of $13.7 billion over 5 years, some of which is assumed to come from PBGC. 

The HELP Committee has the largest instruction of any Senate 

committee, higher than even the Finance Committee, and equal to 

just under 40 percent of the $34.7 billion of projected savings. 

There you can see the HELP Committee has by far the biggest instruction in terms of savings, and they have got responsibility for 

PBGC.

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Congress clearly needs to act, whether as part of reconciliation 

or in some stand-alone legislation. I am interested in hearing more 

from Mr. Belt about the administration’s proposals. 

Let’s go to the next slide. As I see it, there are really four components to the administration’s proposal. Number one, increase premium income, and these are really two elements to that: increase 

fixed premium from $19 to $30 per plan participant, and, second, 

apply variable premiums to every dollar of plan underfunding.

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The second major element of the administration’s proposal is to 

reform minimum funding levels, to reform how companies calculate 

the minimum funding levels that are needed for their pension 

plans. 

Third, prevent companies that have underfunded plans from 

worsening the situation by further increasing pension benefits. 

And, fourth, improving the transparency of the financial status 

of pension plans for employees, pensioners, and investors, and 

other stakeholders. 

This is at least my attempt to summarize, Mr. Belt, the proposals that you are making. 

My own conviction is we need to provide a practical path for employers who have established defined benefit plans, to maintain 

those valuable plans for their employees and retirees. Termination 

should be an extraordinary step for a plan sponsor, not merely another financial option. Employees and retirees are relying on these 

promises, and we should not let them down. 

It is also clear to me that some of the requirements that we have 

had in the past really do not make much sense. We have, in fact, 

restricted companies on what they could put in in the good times 

to their pension plans. And then, of course, when the bad times 

come, the downturn occurs, they are in no position to catch up. So 

I think that is one of the things that require our review as well. 

Senator Gregg has notified me that there is a vote now on an 

amendment in 10 minutes. He has asked me to recess the committee, and we will then return to hear the testimony of our witnesses. Senator Gregg had another committee responsibility. That 

is why he is not here at the moment. He had to go, I think to provide a quorum perhaps there. And then we have this vote scheduled very shortly on the floor, and he feels the best way to conduct 

our business would be to recess the committee at this moment, for 

us both to go and vote, and then return and hear the testimony of 

the witnesses. 

I apologize to the witnesses for this. This vote was perhaps as 

you know, only scheduled late yesterday, so we did not know of it 

when we had scheduled this hearing. So I apologize for that, and 

I apologize to those who are here to listen to the testimony as well. 

We will attempt to reconvene in approximately 10 or 15 minutes. 

With that, we will recess the committee. 

[Recess.] 

Chairman GREGG. I apologize for the break. I appreciate Senator 

Conrad taking over. I appreciate Senator Byrd being here. But we 

did have a vote. And so we shall proceed to testimony. 

Mr. Belt, I guess we will start with you. 

STATEMENT OF BRADLEY D. BELT, EXECUTIVE DIRECTOR, 

PENSION BENEFIT GUARANTY CORPORATION 

Mr. BELT. Thank you, Mr. Chairman. 

Chairman GREGG. Try to bring that microphone a little bit closer. 

Mr. BELT. I will certainly do so. Chairman Gregg, Senator Byrd, 

thank you for the opportunity to testify on the financial condition 

of and risks facing the Federal pension insurance program. Let me 

begin by making a few general observations that I hope will help 

frame the policy choices facing this committee and Congress. 

92

First, the key issue facing policymakers is not really the solvency 

of the PBGC per se. When underfunded pension plans terminate, 

it is not the PBGC that loses. We are merely a passthrough for the 

very stakeholders in the defined benefit system. In reality, there 

are three important constituencies who stand to lose when underfunded pension plans terminate. First, workers and retirees may 

lose promised benefits because of statutory limits on PBGC’s insurance coverage. Second, other companies that have responsibly met 

their pension obligations may be required to pay higher PBGC premiums. And, third, U.S. taxpayers may ultimate be called upon to 

bail out the insurance fund if it cannot honor its commitments. 

Nevertheless, we continue to hear the criticism that the administration’s comprehensive pension reform proposal is focused on saving the PBGC. These criticisms seem intended to obfuscate the real 

issues at stake in this debate. The administration’s pension reform 

proposal has three goals: to protect the pension benefits that workers and retirees have earned; to protect responsible companies from 

paying for the broken promises of their corporate brethren; and to 

protect taxpayers from a costly bailout of the pension insurance 

fund. 

There is no question that the administration’s reform proposal is 

the strongest measure put forward to get pension plans funded and 

to put the insurance program on a stable footing. In fact, I would 

suggest that the administration’s proposal should be the benchmark against which all such proposals are measured. Simply put, 

stronger funding rules mean better protection for workers, responsible companies, and taxpayers. Weaker funding rules mean less 

protection for these three constituencies. 

Consider a real-world example of what happens when underfunded pension plans terminate. United Airlines is defaulting on 

nearly $10 billion of unfunded benefit promises. The pension insurance program will cover roughly $6.6 billion of the shortfall. That 

means the workers and retirees stand to lose more than $3 billion 

in benefits they have earned that were promised to them but never 

funded by United Airlines. It also means responsible companies are 

on the hook for $6 billion that under current law will have to be 

covered with higher premium dollars. And, finally, further large 

losses increase the chances that the pension insurance fund will 

need a costly Federal rescue at some point in time. 

Indeed, with about $40 billion in assets but more than $60 billion 

in liabilities, the pension insurance program is already in a deep 

hole. And without needed changes in law, as recommended by the 

administration, the hole could get much deeper. 

Last year, we reported that the universe of PBGC-insured pension plans was underfunded by more than $450 billion, with almost 

$100 billion of that shortfall in plans sponsored by financially 

weaker companies. Further losses will depend on numerous variables that are inherently uncertain and difficult to predict, such as 

changes in equity prices, interest rates, raw material prices, inflation, and general economic conditions. 

But without needed changes in law, large losses are likely. And 

there are several useful methodologies for analyzing and pricing 

the risk to the pension insurance program. One tool used by PBGC 

is a stochastic model that provides a range of possible outcomes, 

93

depending on different economic scenarios. The options pricing 

model used by CBO which adjusts for market risk is another useful 

analytical tool, and an independent think tank has published a deterministic cash flow model that provides policymakers with yet 

another way to assess the scope and magnitude of the potential 

cost of providing Federal pension insurance under current law. 

Each of these approaches shows that losses will grow substantially under current law, and there are several indicators that the 

risks to the pension insurance program are growing rather than 

abating. The most recent source of information on the financial status of pension plans comes from the reports filed with the PBGC 

by companies with pension plans underfunded by more than $50 

million. The latest reports show that pension underfunding has 

grown by 27 percent compared to a year ago, from $279 billion to 

$354 billion. And the average funded ratio of the plans was just 69 

percent. 

In addition to greater levels of underfunding, market indicators 

show that the risk of default on the part of several companies sponsoring large pension plans has risen appreciably in recent months. 

Meanwhile, PBGC’s premium revenues are not keeping pace with 

the growing losses and exposure. PBGC’s flat rate premium of $19 

per participant brings in only about $600 million each year. The 

variable rate premium has averaged only about $300 million per 

year over the past decade. At current levels, premiums are clearly 

inadequate to close the pension insurance program’s $23 billion accrued deficit, let alone cover future expected claims. 

The administration has put forward a comprehensive pension reform proposal that accomplishes three critical objectives. 

First, it strengthens the pension funding rules so that companies 

set aside enough money to fill their pension promises while using 

real measures of assets and liabilities, not measures of liabilities 

and assets based upon years past. 

Second, it fixes the premium structure to better enable the PBGC 

to meets its commitments to more than 1 million Americans in 

failed pension plans. 

And, third, it opens up the non-public pension underfunding reports filed with the PBGC so that workers and retirees can know 

if their benefits are at risk. 

This is the right approach, and it is a balanced approach. Under 

current law, the PBGC receives no taxpayer money, as you noted, 

Mr. Chairman, and its obligations are not backed by the full faith 

and credit of the United States Government. In other words, premium payers are responsible for the obligations PBGC has assumed from terminated plans. If premiums are not sufficient to 

cover past or future losses, then Congress will have to address the 

question of who pays. When the PBGC runs out of money, should 

participants in terminated pension plans expect to stop receiving 

their benefit checks or will pressure build to ask the taxpayer to 

restore the insurance program to solvency? 

The administration believes there is a better approach: fix the 

funding rules now to require companies to fully fund the promises 

they have made to their workers. That is the best insurance policy 

for plan participants, premium payers, and ultimately taxpayers. 

Thank you, Mr. Chairman. 

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[The prepared statement of Mr. Belt follows:]

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Chairman GREGG. Thank you, Mr. Belt. 

Dr. Holtz-Eakin? 

STATEMENT OF DOUGLAS HOLTZ–EAKIN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. Chairman Gregg, Senators, thank you for the 

chance to be here today to talk about this important and timely 

issue. 

In our written testimony we walk through all of the comments 

that I am going to make, but I thought I would focus my oral remarks on four key points, the first being, how large is the commitment represented by pension insurance for defined benefit pension 

plans? How much of that commitment will be picked up by the U.S. 

taxpayer? What are effective ways to improve the conveyance of information to this committee and to other members of Congress so 

as to more carefully monitor the financial condition of the PBGC, 

and what would be the impacts of policy options, particularly those 

relevant to the reconciliation process on the economic and budgetary challenge that is pension insurance? 

Beginning with the size of the pension problem, the caveat I 

would like to put at the outset is that the numbers I am about to 

discuss are a work in progress. They represent ongoing work at 

CBO to more accurately measure the economic cost of insurance 

provided on the Federal budget. The goal of this particular exercise 

is to essentially estimate the size of the check that one would have 

to write to modern financial markets in order to have them provide 

such pension insurance, and as a result, the CBO exercise is really 

a three-step process which is the same process that any financial 

market analyst would undertake to look at the PBGC and the insurance it provides. 

Step one would be to estimate the probability that any pension 

plan sponsor might enter bankruptcy, and to examine the assets 

and liabilities and ongoing business operations for that probability. 

Step two is to estimate the potential range of underfunding for 

any plan that might arrive at the PBGC as a result of a bankruptcy, and at that termination estimate the check that will have 

to be covered. 

And then Step three is to value this underfunding at market 

prices. Markets are especially conscious of the time at which money 

has to be paid out. Money paid out at bad times is more expensive 

than money during good times. And unfortunately, volatility is a 

key aspect of providing insurance, and pensions tend to arrive at 

an insurance agency at the same time the economy dips and thus 

cash flows are weak, at a time when the stock market is down and 

thus asset values are reduced, and at a time when interest rates 

are lower, and as a result, valuations of liabilities increase. 

So at the same time that the insurance is most likely to arrive, 

it is at a time when markets will place the greatest price tag on 

it, and as a result, incorporating this market risk as an ongoing 

part of valuing the insurance is an important aspect of what we do. 

If we go to the first slide, you can see that undertaking this exercise reveals some magnitudes of the market valuation of the insurance provided to defined benefit pension plans, and there are really 

two kinds of costs displayed on the slide. The first and the one that 

132

is segregated at the bottom is what is labeled the ‘‘sunk costs.’’ 

These are the costs for those plans that are in actuality or in effect 

already under water and have arrived at the PBGC or are quite 

likely to do so. 

There, as Mr. Belt mentioned, the real issue is who will pick up 

the tab? Will it be workers and retirees? Will it be firms and their 

shareholders, or will in fact some of this cost be picked up by the 

American taxpayer? 

The remaining costs are prospective costs, likely insurance that 

would be paid out over different horizons, rising from 48 billion 

over the next 10 years to 68 billion over a 20-year horizon, and it 

is those costs that can be changed by policy and that the deliberations of the Congress are most important in thinking about. 

Step two is to ask what is the current taxpayer exposure to these 

costs? And there the answer is quite simple. As the chairman 

noted, under current law the explicit liability is zero. I think you 

refer to this as a theoretical zero, but there is going to be clear 

pressure on a cash flow basis as the PBGC shows annual deficits 

and ultimately exhausts its on-budget and off-budget assets. There 

will be pressure for the Congress to contemplate providing more of 

the taxpayers’ resources to this problem, and there the question is, 

how much, and how will this decision be made? Is it the case that 

there should be an ongoing subsidy to provide low-cost insurance 

to defined benefit pensions as a matter of policy, and in doing so, 

how will the Congress recognize those costs on both the outlay side 

as well as on the revenue side, where the implications of all pension reforms will affect tax liabilities of firms? 

The next step, if we go to the next slide, is trying to provide information to this committee and to the Congress so as to better 

monitor the current and any changed condition in the insurance for 

defined benefit pension plans. 

There are really two vehicles for this, the annual budget statements, and also the financial statement of the United States Government, and under current law the budget shows a very incomplete and partial snapshot of the PBGC’s financial condition, showing only the on-budget aspects of the operations, and the cash 

flows, premiums coming in, benefit payments going out, and this 

has permitted the budget to reflect the PBGC as a profit center, 

when in fact in any economic measure it has been losing money for 

a sustained time. 

The financial statement currently shows the $23 billion in the liability which includes probable terminations, but also has broader 

measures in the note disclosure about possible terminations that 

could get as large as an additional $96 billion. 

Now, possible alternatives going forward would be to leave the 

current statements unchanged, or to move both the budget or the 

financial statement toward presentations that are more reflective 

of the economic cost. One could imagine putting on the budget the 

accrual cost of additional exposure including the market value of 

the risk. Those would be numbers quite similar to the type that I 

presented at the outset, or you could take a more limited approach 

and simply identify the annual equivalent subsidy, the pricing 

below market of the pension insurance provided to firms, and place 

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terprise. And on the financial statement one could imagine moving 

to a full accrual cost using market values as a way to inform the 

Congress better about the ongoing financial condition of the system. 

Let me close with a few thoughts about policy options that appear to be under consideration at the moment, broadly broken into 

two categories, those which would affect premiums and those which 

would affect funding rules and reporting requirements. 

Under premiums, it is clear that there are aspects to improve 

policy on pension insurance fund. The first would be to overall 

raise premiums so as to lower the subsidy present in the insurance 

system and to have as a result firms more accurately reflecting 

their decisions to provide compensation, the true cost of making 

sure that that compensation, which is promised at one point in 

time, will actually be paid at a later point in time regardless of 

what economic circumstances might transpire in between it, the 

firm or the industry or even the economy-wide level. 

It would be desirable to move the premiums toward ones that reflected risk in a more comprehensive fashion. This would provide 

better incentives and also lead to lower subsidies from low risk to 

high risk sponsors in these kinds of plans, and one could do that 

by linking the risks to the plan’s assets or by linking it to a sponsor’s financial status at investment grade or below investment 

grade, for example, or a variety of other methods that we outline 

in the testimony. 

Now, overall, to change the economic problem, the $48 billion of 

the likely cost that we identified at the outset, would require a fivefold increase in premiums as currently charged. At the moment we 

are collecting about $1 billion in premiums per year to meet the 

reconciliation kind of instruction that has been debated on the 

order of 6 to 7 billion dollars over the budget window, would require only doubling those premiums between 2006 and 2010. The 

five-fold increase would eliminate the economic cost. Merely doubling would reduce it. 

If it was done via strictly the flat rate premium, that would require raising it to about $60 from $19 at the moment, and that 

would have an economic impact of reducing the cost by only $7 billion to $41 billion. If one chose instead to focus exclusively on the 

variable rate premium, the $9 per $1,000 of underfunding, that 

would require an increase to about $27 from $9. This would have 

much more dramatic incentive effects, and lower that prospective 

cost by $18 billion. However, it would most likely provide incentives for some sponsors to terminate or freeze their plans at the 

same time. 

The second broad category of changes are those in funding rules 

and reporting, where it would be desirable to more closely price assets and liabilities to their market value. The essence of insurance 

is to capture the volatility so that when bad times arrive it is recognized that they are present. Market values are most reflective of 

those situations. In doing so it would be desirable to match more 

closely the characteristics of assets and liabilities, provide, as a result, hedges, so that when liabilities go up, assets go up at the 

same time, and vice versa. This is a substitute and a complement 

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to providing greater funding overall to make sure that the net positions move in the same way. 

Finally, it would be desirable to consider all the costs in measuring liabilities. As has been made vivid by several recent examples, it is often the case that what appears to be a funded plan arrives in bankruptcy severely underfunded because of shut-down 

benefits, lump sum cash payouts in the pension plans, having liabilities more reflective of all those costs so that we get—better 

funding would be desirable. In doing so, it would improve the 

transparency of the pension system. This would allow both workers 

and markets to more carefully monitor it and provide incentives to 

either fully fund, and thus bring the resources to the future on the 

part of the firm, or to purchase appropriately priced insurance from 

the PBGC and provide the resources in that fashion. 

In all cases, I just remind the committee that in moving either 

funding rules or moving premiums, there will be not only outlay 

consequences but also potential revenue consequences which are 

important in thinking about the net impact of these changes on the 

exposure of the taxpayer and the overall budget process. 

The CBO thanks you for the chance to be here today and we look 

forward to your questions. 

[The prepared statement of Mr. Holtz–Eakin follows:]

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Chairman GREGG. Thank you, doctor. Would you send us a memo 

as to how we should change the budget accounting rules so that we 

more accurately reflect this, so we could maybe incorporate that in 

our rules next year? 

Mr. HOLTZ-EAKIN. We would be happy to work with you on that. 

Chairman GREGG. We did in the reconciliation instructions direct 

Finance and the HELP Committee, the HELP Committee having 

primary jurisdiction here, to do $6.6 billion of premium increases 

in this area. I guess my initial question to Mr. Belt and to you, doctor, if you wish to comment on it, is what effect does this have on 

the PBGC if we were to pursue the reconciliation instructions? 

Mr. BELT. As Doug noted, the size of the accrued deficit is $23 

billion. We can also expect significant future claims. Those claims 

will be large or smaller depending on how strong the funding rules 

are that are finally implemented. Clearly, the $6.6 billion is well 

insufficient to fill the current hole, let alone cover future expected 

claims, so that does then raise the question, if it is not going to be 

the premium payers that either the hole for the sunk costs or are 

not fully covering expected future claims, then who does do that? 

Ultimately, from PBGC’s perspective, you either have to end up, 

as you noted, Mr. Chairman, assets drained down, and at some 

point in time we would not be able to honor the commitments we 

have taken on to a million plus participants, and that number is 

growing and growing unfortunately for all the wrong reasons, or 

the resources would have to come from somewhere else, general 

revenues, which under current law are not available to us, and the 

taxpayer would be called upon to rescue the program. There is no 

magic number. We know what the size of the current hole is. We 

can project, using various methodologies, as CBO has done, what 

the future expected costs are, and then it is a question of who covers those costs. 

Chairman GREGG. The current hole of $23 billion is over what 

period of time do you expect to have to pay that down, I mean you 

would cover that? 

Mr. BELT. That is the size of the current deficit. That is, we have 

taken—

Chairman GREGG. Assuming you were to cover it. 

Mr. BELT. We have assets of a little over $40 billion now. We 

have taken on pension promises that have a net present value in 

excess of $23 billion more than that, in excess of $60 billion. As you 

noted, in contrast to the S&L crisis, we are not facing a liquidity 

problem right now. Currently we are paying out about $3–1/2 billion, or this year we will pay out about $3–1/2 billion in benefit 

payments, and that number is going to steadily increase. But we 

have sufficient resources on a cash basis to cut benefit checks, subject to the maximum guarantee limit, for a number of years yet, 

but it is not a sustainable business model. 

The hole is deep, and every day it gets deeper. When we take on 

United Airline pension plan, we take on $7 billion in assets in that 

pension plan. That is two years worth of benefit payments. The 

problem is we have also taken on $17 billion of promises associated 

with that, and ultimately the question is, how do we make up that 

gap? 

154

Chairman GREGG. Let me phrase my question another way. We 

know that 15 years from now you are not going to have any assets 

under the present projection to pay any benefits. So anybody that 

ends up in your fund is going to get zero on their pension. With 

these reconciliation instructions, does that take it out to 17 years, 

to 20 years? 

Mr. BELT. I believe our modeling shows—and of course it is dependent on a host of factors looking forward—that it actually does 

not improve our position. It lessens the deterioration of our financial position, but it does not improve our financial position. 

Chairman GREGG. So how much more would we have to do? And 

when is the tipping point? In other words, if we go to 12 billion do 

we put more people in your fund than we actually protect the fund 

with assets? 

Mr. BELT. Perhaps I can approach that in a slightly different 

way. Ultimately, behavioral changes are difficult to model, but I 

think we can put the premiums in perspective that will be helpful 

in framing the policy debate. The total premium revenue collected 

under the flat rate premium now is about $600 million a year, and 

the total premiums we have collected are a billion a year. We are 

talking about, under the Budget Act reconciliation instructions, an 

additional $6 billion. The amount of money that companies would 

have to put in the plan to close the gap and exit the system, if they 

chose to do so, would be $450 billion, substantially more than that 

extra $300 million proposed under the flat rate or the extra, the 

little over a billion dollars a year relative to current law, in the reconciliation instructions. 

So it is really a drop in the bucket. Take the example of the largest pension plan out there, General Motors, which I think has 

about 700,000 participants. The proposed increase in the flat rate 

premium from $19 to $30 would mean their pension insurance cost 

would go up with respect to that component about $8 million a 

year, certainly significant, but the company has revenues of excess 

of $150 billion a year. Its health care costs are $5 billion a year. 

The premiums need to be put in perspective. It is a cost. There is 

no question about that, but it has been underpriced, as Dr. Holtz–

Eakin noted, for a substantial period of time. 

I do not know what the tipping point is. It is going to vary from 

company to company. From a systemic standpoint premiums are 

very, very small, even under the Budget Act and even if you substantially increase those relative to the needed cash contributions 

to the pension plan to make up the funding gaps. 

Chairman GREGG. Thank you. 

Senator CONRAD.

Senator CONRAD. Thank you, Mr. Chairman. 

Mr. Belt, as I understand it, under the administration’s plan, if 

an employer’s bonds go to junk bond status, that would then trigger a requirement for new pension contributions and additional 

premiums. Does that not further threaten the viability of the enterprise? 

Mr. BELT. What the administration’s proposal is trying to do, 

first and foremost, is make sure that we begin in a very measured 

way to fill the gap. We have an extraordinary amount of underfunding, chronic underfunding on the part of pension plans, that 

155

when plans terminate it results in workers and retirees losing their 

hard-earned benefits. As noted with respect to the case of Ms. 

Sarasini, potentially half or more. It is a tragic situation. There is 

a very human toll. What we are saying is ‘‘Let us make sure that 

there are sufficient assets on the pension plan to cover the promises made, and then also, as the chairman noted earlier, to not 

make new hollow promises when they cannot afford to pay the old 

promises.′′ We are also trying to reflect the fact that there is risk in the system, and as in any properly designed insurance system, you want 

to encourage appropriate behavior and discourage risky behavior. 

That is not the way the current system is constructed. We want to 

start moving in that direction. 

With respect to credit ratings, I would note—and we just pulled 

up the Standard & Poor’s data, looking at average default rates—

the default risk for non-investment grade companies is 20 times 

higher than that for investment-grade companies over a 5-year period, not 20 percent higher, 20 times higher. 

Senator CONRAD. 20 times higher. Let me ask you this question. 

I do not see anywhere in this proposal a changing of the limitation 

that we currently have on companies’ contributions when things 

are going well. Is that not part of the problem? I mean I have had 

so many companies tell me, ‘‘Gee, we have been frustrated because 

there is a limitation on what we can put into the fund when things 

are going well.’’ Then as the system, as it has been described to me, 

when things get tough, when the economy falters, when it becomes 

clear that they are underfunded, then the requirements increase. 

It is almost like we have got it upside down and backwards. 

Mr. BELT. Actually, Senator, the administration proposal does 

propose that companies be given additional flexibility beyond current law to increase the amount of tax-deductible contributions into 

the plan in any given year. 

Senator CONRAD. How do you do that? I am glad that you have 

got that as part of the plan. I did not see it as I went through the—

Mr. BELT. It is a core element to actually provide them to be able 

to make tax-deductible contributions up to 130 percent of their 

funding target. So that is a substantial increase relative to current 

law. Obviously, that has revenue consequences, and it is usually 

anathema to tax policy to allow people to control the timing of their 

losses—

Senator CONRAD. I understand. I understand. That has got an effect on the Federal revenue, right? 

Mr. BELT. Yes. 

Senator CONRAD. That is going to reduce Federal revenue to have 

them be able to make further contributions. 

Mr. BELT. The administration is supporting and providing that 

additional flexibility. Having said that, the argument that the maximum contribution limit has materially contributed to the current 

level of underfunding is unfortunately not wholly correct. 

Senator CONRAD. And why not? 

Mr. BELT. We analyzed that. We looked at the data. And in some 

years 80 percent of the companies could have contributed more 

during the good times and did not do so. That is, they did not bump 

up against the maximum contribution. 

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Senator CONRAD. They could have done more even under current 

law, but did not. 

Mr. BELT. Yes, even under as I said, the worst of years, more 

than half the companies could have contributed more, that is, they 

would not have bumped up against the maximum contribution 

limit, but they did not. It has not been a material contributing factor to the current funding gap. 

Senator CONRAD. I am running out of time. I want to get this 

question in to you. You know, in business school, we often talked 

about the 80/20 rule. 20 percent of your clients do 80 percent of 

your business. The 80/20 rule just seems to follow in many, many 

applications. That is, a small percentage of the entities out there 

are the biggest part of your problem, and the biggest part of your 

opportunity. 

If we would be looking for the element that is contributing most 

of the problem, what would that be? 

Mr. BELT. Well, there is a combination of factors. Companies 

have been taking on substantial investment risk in their pension 

plans, and the consequences of taking on that risk were borne out 

beginning in 2000 when—

Senator CONRAD. In what way were they taking on—

Mr. BELT. They have a mismatch, a fundamental mismatch between their assets and liabilities. Their liabilities are very bondlike in nature. The assets were disconnected from the bond-like nature of those liabilities. So they had exposure both to changes in 

equity prices as well as interest rates. 

Senator CONRAD. So they were taking out-sized risks? 

Mr. BELT. I do not want to characterize it as out-size. They were 

taking risk. And there was—

Senator CONRAD. Well, it did not turn out. 

Mr. BELT. There was substantial duration risk. And what you 

saw then is the asset prices were falling, the liabilities were increasing in value because of lower interest rates at the same time, 

and in some cases companies were making new pension promises, 

and liabilities were accruing ordinarily in any event. In addition, 

because of smoothing mechanisms built into current law and which 

the administration proposed to eliminate, this was hidden from 

view. In addition, because of another mechanism under current law 

called credit balances, companies were able to avoid putting cash 

in during these years, notwithstanding the fact that the gap was 

widening during this period of time. 

We would also propose to eliminate credit balances, again, making sure that we have meaningful asset and liability measures, and 

a meaningful funding target. 

Senator CONRAD. My time has expired. 

Chairman GREGG. Thank you. 

Senator ALLARD.

Senator ALLARD. You mentioned the 450 billion total liability on 

the companies and I was not clear as to over what time period that 

was, Mr. Belt. 

Mr. BELT. That is the current size of the hole when you look at 

measuring those assets on a market basis, the entire assets in the 

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counted back, the net present value of the promises they have 

made. So that is the current size of the hole. 

Senator ALLARD. I see. Now, in your view is this problem something that can be solved now without putting an undue burden on 

the participants on the guaranty fund? 

Mr. BELT. That is certainly the objective of the administration’s 

proposals, to address the problem now so that we avoid having situations like United Airlines in the future, where not only do the 

participants—the workers and retirees—lose a substantial amount 

of the benefits that were promised to them, but companies that 

have acted responsibly then are called upon to pay higher premiums, whether it is $6.6 billion or some other number, or if Congress decides not to put it all ont premium payers, then where else 

are the monies going to come from? Are we going to stop cutting 

checks to the participants or are we going to ask the American taxpayer to step in? 

Senator ALLARD. There was some discussion that other airlines 

might follow, since you mentioned United, there was some discussion that other airlines may follow up and do what United had 

done. What do you view as the likelihood of that happening? 

Mr. BELT. Ultimately that depends on market conditions and 

their own unique business needs. The situation with respect to the 

legacy carriers that are now in Chapter 11 is different, each one 

is different from another. 

Senator ALLARD. Let me put it this way. Is there a concern of 

the administration that other airlines will likely follow United? 

Mr. BELT. There is certainly a concern that, given the fact that 

the CEOs of each of the other legacy carriers have indicated publicly that they would feel competitive pressure to at some point potentially enter Chapter 11 and seek to terminate their pension 

plans. Given the fact that those pension plans are substantially underfunded by an excess of $20 billion, there is no question we are 

concerned about that. 

Senator ALLARD. With the administration’s plan that you have 

now, when do you think that you could get the pension fund back 

on solid footing financially? 

Mr. BELT. The administration’s proposal is to require companies 

to fully fund their pension plans over a 7-year period. 

Senator ALLARD. So you think in 7 years we could be—

Mr. BELT. You are always moving towards 7 years. There is a 

new amortization schedule established each and every year, and as 

long as you are still taking investment risks, the assets or liabilities may be greater or lesser during that period of time. 

But I also want to note that that 7-year time frame that the administration proposed is trying to be fairly measured and responsible when it is compared to current law. Current law has multiple 

time periods for funding deficits—as little as 3 years if you are captured by the Deficit Reduction Contribution Rule. So under current 

law, you may have to make up that funding gap in as little as 3 

years, which is the case for the airlines. 

Chairman GREGG. Senator Allard, may I? 

Senator ALLARD. Follow up, Mr. Chairman. 

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Chairman GREGG. Just so we are all on the same page here, you are talking of the administration plan, which is $12 billion more 

than what the reconciliation instructions in the budget were, right? 

Mr. BELT. Well, I was not talking specifically about—

Chairman GREGG. You are talking the—

Mr. BELT. —specifically about the premium aspect of it. I was 

talking more about the funding rules portion of it. Again, the emphasis in the administration proposal is not to have monies coming 

into the PBGC, although clearly we need to figure out how to fill 

the hole. The emphasis of the administration’s proposal is making 

sure there are sufficient assets in the pension plan to cover the 

promises that are made so we do not have to worry about losses 

occurring to a pension plan down the road. 

The weaker the funding rules are, the more we are going to have 

claims, and that is going to necessitate higher premiums. There is 

a direct connection between the two. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman GREGG. Senator Byrd. 

Senator BYRD. Thank you, Mr. Chairman. Thank you, Mr. 

Conrad. 

Dr. Holtz-Eakin and Director Belt, we remember in West Virginia a great union leader, John L. Lewis. He spoke of those who 

supped at labor’s table and who are sheltered in labor’s house. 

Many of the workers in my State sacrificed their wages to ensure 

higher pensions in retirement. And they view those pensions as 

much their entitlement for a day of labor, as their Friday paycheck. 

These workers are outraged that companies can escape their pension and health care obligations through escape clauses. They escape their pension and health care obligations through bankruptcy. 

In West Virginia it has happened in the coal industry, it has 

happened in the steel industry, it has happened in the aluminum 

industry and in the special metals industries. Businesses, rightly 

or wrongly, file for bankruptcy, and workers, through no fault of 

their own, find themselves stranded, too young to collect Social Security, too old to find a new job. 

Congress, Director Belt, recently passed legislation cracking 

down on individuals who abusively shed their debts in bankruptcy. 

What further reforms are necessary to ensure that companies do 

not abusively shed their pension obligations in bankruptcy? And 

what changes to the corporate bankruptcy laws, as they relate to 

pensions, should the Congress consider? 

Mr. BELT. Senator, I would be delighted to take the first crack 

at that. There is no question that under current law the interaction 

of ERISA, the Employee Retirement Income Security Act, and the 

bankruptcy code leads to bad outcomes, and multiple losers. All the 

stakeholders lose, workers and retirees. You have companies, responsible companies, and they would be on the hook for higher premiums. Not only that, but they may face the prospect of having to 

compete against a rival that now has the Federal Government subsidizing its labor cost on an ongoing basis. 

In addition, it exposes the taxpayer to risk down the road. That 

is current law. Current law does allow companies a method, a 

mechanism for filing Chapter 11 and seeking to have their pension 

plans terminated under so-called distress termination. 

159

PBGC has a very limited role in that process. That is ultimately 

a determination made by a bankruptcy judge under the Bankruptcy Code, if they find that the company would be unable to 

emerge from Chapter 11 successfully if it had to maintain one of 

more of its pension plans. Certainly, we have seen that happen, we 

have seen it happen in too many instances. 

What was particularly troubling to us—and the administration 

has a specific proposal to address this—is a situation that arose 

with respect to United Airlines last summer, when it had a legally 

required contribution that it had to make under ERISA of $70 million last summer. It said it elected to defer that contribution even 

though there is no concept of election or deferral under the law. 

And there was ultimately no consequence to their not only missing 

that legally required contribution or other subsequent contributions 

because of the operation of bankruptcy code. 

If they had not been in Chapter 11, a lien arises automatically 

under the operation of law, and PBGC would have the ability to 

enforce that lien. In bankruptcy, however, although the lien arises, 

the automatic stay provisions of the bankruptcy code kick in and 

we can not take any action. So as a result there was no practical 

consequence to United of simply not making a legally—

Senator BYRD. But what reforms are necessary to ensure that 

companies do not abusively shed their pension obligations in bankruptcy? What changes to the corporate bankruptcy laws as they relate to pensions should the Congress consider? 

Mr. BELT. The only other—perhaps Dr. Holtz–Eakin has some 

thoughts on that. I would note that part of the administration’s 

proposal is to address the issue that arose last year, is to make 

sure that PBGC would have the authority to enforce a lien in bankruptcy, which we think is one critically important change. 

Senator BYRD. Dr. Holtz–Eakin? 

Mr. HOLTZ-EAKIN. A different way to think about this is that 

pensions are just like wages. They are compensation that is given 

to workers, and it is earned at the time the work is done. That is 

over once the work is finished. And it should not be affected by any 

reorganization in bankruptcy or outside of it as a result of competitive pressures. And so the challenge is to make sure that the compensation that has been earned is carried forward in time and paid 

to the workers upon retirement. That can be done either internally 

with better funding rules to make sure the resources are actually 

there, or externally by paying an appropriate price to someone like 

the PBGC to deliver those resources at the time the worker retires. 

But it is not necessarily a bankruptcy problem. Bankruptcy is 

about economic reorganizations. It is about making sure that firms 

make adequate preparation internally or externally to provide that 

compensation that has already been earned. 

Senator BYRD. My time is up, but is what you say—I say to 

both—is what you say enough to prevent companies from abusively 

discharging in bankruptcy their pension obligation to workers? 

Mr. HOLTZ-EAKIN. Director Belt is more familiar with the rules 

than I am, but to my knowledge, no one is accused of abusing 

rules. They are following the rules. So the key will be to write rules 

which strengthen both the internal and the external funding for 

these pensions. 

160

Mr. BELT. The only other point I would note, Senator, in that regard, is that bankruptcy is at the end of the process—and PBGC 

historically—once we are in bankruptcy as a general unsecured 

creditor, receives about 5 to 7 cents on the dollar in claims recovery. 

The focus really should be on the front end. There is nothing that 

we can, in my view from a governmental perspective, do to change 

the business cycle. Companies are occasionally going to go out of 

business. What we can and should do something about is, if they 

sponsor a defined benefit plan, making sure that there are sufficient assets in that pension plan to cover those promises, so everybody is getting 100 cents on the dollar. We are not at the very end 

of the process, worrying about getting a nickel on the dollar. 

Senator BYRD. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman GREGG. Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. 

I want to go back and get some figures corrected. $450 billion 

was mentioned. Is that the overall number of all pensions that all 

companies have, whether it be a defined pension program? In other 

words, is that whole world we are looking at? 

Mr. BELT. It is defined benefit plans. It is the amount—

Senator BUNNING. That has nothing to do with 401(k)s, it is just 

the defined benefit plans? 

Mr. BELT. Correct, Senator. 

Senator BUNNING. One of the—

Mr. BELT. I am sorry. Just one clarification about the private sector defined benefit plans. That does not include public sector defined benefit plans. That is a whole other issue and an even bigger 

gap. 

Senator BUNNING. One of the solutions would be to freeze, until 

made whole. In other words, I ask this question because there is 

usually a 30-year rule that if you start a defined benefit plan and 

you have promised your employees X amount of dollars, and you 

are the corporation, you have 30 years to fund that pension. Is that 

incorrect or correct? 

Mr. BELT. That is one of the funding elements, yes. There are 30-

year amortization periods under current law. 

Senator BUNNING. Obviously, business cycles and many other 

things take hold, particularly those who were funding their pensions with their own securities. I know we made some changes 

there, but for a while the only thing that went into a pension program, if you were a Procter and Gamble, was Procter & Gamble 

stock, and if the stock went down the company’s assets went down. 

The defined benefit program went down, so it was not good if you 

had a down cycle. 

I do not know what United and Delta and Northwest and all of 

these legacy airlines are doing, but I think they started out with 

pension programs that invested in their own stock, or that was 

part of. Would that be a good rule, that you should not be able to 

put your own stock? I mean we have it to a certain point now. 

Mr. BELT. There are severe restrictions under current law, Senator, on non-cash contributions. 

Senator BUNNING. But that is just recent. 

161

Mr. BELT. It has been in place for a while now. There is a process 

that one can go through, and it is under Title I, and the Employee 

Benefit Security Administration administers that, not PBGC, 

where a company if it wanted to put something other than cash 

into the pension plan, would have to get a prohibited transactions 

exemption from the—

Senator BUNNING. It sure would stop management from over 

promising if there was a shorter period of time for funding. In 

other words, if you had a 7-year window to fund a benefit plan, you 

surely could not go out and promise 50 percent of wages for a 20-

year, 25-year employee, because you could not possibly fund that 

kind of benefit in a shorter window of 7 years, say, rather than 30 

years. So there are a lot of little things that can be done—and I 

do not think the administration has covered all of them in their 

proposal—to make whole the employee in the future. And for God’s 

sake, we have to change the escape clause that the corporations 

now have of dumping their employees on the PBGC in bankruptcy. 

This Pension Guaranty Trust Fund was not ever set up to do what 

it has been asked to do. 

CBO’s, the number $450 billion, there is no way, there is absolutely no way we will ever get there unless taxpayers foot the bill. 

And with the restrictions on PBGC as far as return, maximum return to those people who deserve and have earned those benefits, 

because that was part of their compensation package, we are not 

going to get to that number unless we get taxpayers’ money involved. Is there any other suggestions that we can stop the hemorrhaging? I am asking. 

Mr. HOLTZ-EAKIN. I think a couple of thoughts on it. Number 

one, 450 billion is unlikely to be the number that would show up 

at the PBGC. Our estimates suggest that something more modest, 

$100 billion over the right horizon would be the cost. But your general point is well taken. 

Number two, some of that you cannot change. It is a matter of picking up the bill one way or another. That is the $23 billion number for sure. The remainder is—

Senator BUNNING. 23 billion is not going to break the Federal 

Government. 450 billion added on to what we already owe just 

piles debt onto debt. 

Mr. HOLTZ-EAKIN. And the remainder is about improving incentives, either for better funding, the funding rule changes, or by paying if you do not fund, which is higher premiums too, and insure 

like the PBGC. And your point that sometimes you are going to 

have to fund this and make clear the cost of a promise you made 

to workers, if that is clearer, if the transparency is improved, 

shareholders are going to see the nature of that promise as well, 

and they are going to know that that money is going into the pension, not coming back as dividends. That will improve incentives as 

well, so it all fits together. There are a variety of things that Congress can do. 

Senator BUNNING. Thank you, Mr. Chairman. 

Chairman GREGG. Thank you, Senator. 

Senator STABENOW. Senator STABENOW. Thank you, Mr. Chairman. I want to thank 

you for holding this meeting. I think this is one of the most critical 

162

issues confronting all of the families that we represent, and appreciate both of you being here today. 

I want to first just indicate that I think it is important to stress 

what has been said by colleagues, and also with you, that we are 

talking about pensions that are part of wages that people have 

earned throughout their lives. This is about creating the American 

dream, and really creating the middle class of America that has 

been the economic engine for us. You work hard, you pay into a 

pension. You may not take the pay increase that you would otherwise. But you are paying into a pension, and you are also getting 

health care. We have a whole generation of families now that are 

counting on this and have worked hard for this all their lives. So 

this is pretty serious business, pretty serious discussion we are 

having—but I think we all are interested in knowing how best to 

address this right now. 

I think it is also safe to say, and looking at this CRS report, that 

we are really talking about something that has happened just in 

recent years. In 1996 the PBGC showed a surplus for single-employer programs for the first time in its history, and it peaked in 

2000, and is now, as a result of the economy, and this is now saying particularly steel and airline industries, we have large deficits. 

And multi-employers had surpluses for 20 years and are now looking at deficits. 

I wish, frankly—hindsight is always 20/20, but I sure wish we 

had been having this discussion three or four years ago, frankly. 

Every year we wait on this has caused deep, deep problems for 

American families and American workers. 

But my question really relates to how we move forward now in 

a way that does not unduly hurt those businesses that are already 

in serious trouble, being pressured on many different angles, obviously General Motors in Michigan, and what is happening in terms 

of the auto manufacturers and other manufacturers is critical. 

They did the right thing. They have paid their employees well. 

They provided pensions. They provided health care. They have 

done all that they were asked to do in terms of doing the right 

thing in corporate America. 

And now my concern is that we see, just as they are being pressured with high health care costs, exploding health care costs, 

issues of illegal trade practices, both of which I would hope we will 

address together in a bipartisan way because I think these are the 

larger, long-term issues that are pressing these companies. But 

now we are seeing a proposal for a five-fold increase in premiums, 

and I understand why. 

But my concern is—and Mr. Belt, I would first ask you. I mean 

how do we shore up the pensions without driving the less healthy 

companies right now into bankruptcy, which I think is a serious, 

serious issue for us right now. Putting the majority of the costs, 

majority of the increases onto those that are already struggling 

with legacy costs, already struggling at the ends, seems to me to 

be placing them in an even more dangerous situation for employees, as well as the business. 

Mr. BELT. It is a very good question, Senator. I would make a 

couple of observations in that regard. First, the last thing we want 

to do as a policy matter and the last thing I want to do wearing 

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my business hat, I think, as the PBGC, is exacerbate the problem 

or drive the good actors out of the system. The defined benefit 

plans are good things for employees, for workers and retirees. We 

want those to be maintained. If we drive people out of the system, 

that means my revenue base from a business standpoint is eroded 

and that is the last thing we want to have happen. 

I think we need to recognize that there is a steady erosion under 

the current law from the defined benefit system. We have got to 

figure out how to stabilize that system and hopefully turn the corner. We also have to recognize under current law that there are 

these huge risks, losses have already occurred and risks of future 

losses, and we have not yet solved the problem of who pays for 

those. Under current law it is the premium payers. It is the GM 

and everybody else that sponsors a pension plan that are on the 

hook for the losses of United Airlines, US Airways, Wheeling Pitt, 

LTV, Weirton, PanAm, Eastern, et cetera, et cetera. I do not believe that—we had this discussion a little bit earlier—that an increase in premiums in and of itself is going to require or necessitate a systemic exit from the system. Again, relative to the funding gaps in the pension plans, that $450 billion in single-employer 

plans, plus another $150 billion in the multi-employer program, 

and the $100 plus billion of exposure we have to companies that 

are non-investment grade, at higher risk of default, that $6.6 billion of premium increases proposed under the Budget Act is fairly 

modest, as would the $18 billion proposed under the administration’s budget submission. That was over 5 years. 

Also, even though it is a voluntary system, companies do not 

have the unilateral ability to freeze or exit the system if they are 

covered by a collective bargaining agreement, as you well know. 

That has to be negotiated. 

The consequences of leaving in the status quo flexibility—some 

would characterize this as flexibility, I would characterize it as 

loopholes—is that we are going to continue to end up with terminated pension plans that are substantially underfunded and everybody loses. So we have got to do something to address that. 

We believe the administration proposal provides ample incentive 

for companies not only to maintain their pension plans, but hopefully create a dynamic such that they can make an economically 

viable decision to start new pension plans. We greatly simplify the 

rules. Plan sponsors have long complained about the complexity of 

the rules, and they are absolutely right. They have asked for a permanent corporate bond rate to discount their liabilities, rather than 

the old Treasury rate. We are proposing that. 

The earlier point, giving them greater flexibility to fund up during good times, they have not really used that much in the past. 

We hope that they will do so in the future, and will give them that 

greater flexibility. 

We also support resolving the issues with respect to cash balance 

plans. Congress needs to address that because if there is a future 

to defined benefit plans it is in hybrid structures. There have been 

issues with respect to conversion that need to be addressed, but 

that type of plan is critically important. We believe we have to stop 

the hemorrhaging, have to stop the hole from getting deeper, and 

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mented in a responsible, measured way over time. We have proposed 7 years, which is in contrast to the 3 to 5 years that some 

companies have to face under current law. 

Senator STABENOW. I appreciate that, and I certainly, as you 

raise the issue of bankruptcy, as well support what you are talking 

about in terms of getting around the ability to move into bankruptcy and to be able to move your pension plan into the PBGC. 

Just quickly if I might, Mr. Chairman, just one other quick question. I am wondering at this point in terms of employees and economic impact of employees, when a system moves into the PBGC, 

what is the typical percentage right now of the promised pension 

payment that can be expected by an employee? 

Mr. BELT. The average pension benefit I believe—I am not sure 

we have this data. It is in our data book and I may be wrong on 

this. It is less than $10,000 a year is the average pension received 

under a DB plan by—

Senator STABENOW. But what percentage now—when you are 

talking about dollar for dollar, how much for every dollar that 

somebody has paid in their pension plan would they expect to be 

able to receive? 

Mr. BELT. It totally depends on the individual and the construct 

of their plan and the benefits that are promised. The guarantee 

covers up to a limit established by Congress, an annual benefit of 

more than $45,000 a year for somebody taking an annuity at age 

65. So historically the vast majority of participants in the system 

have not been hit by the maximum guarantee limit. They have gotten all the benefits that were promised under the plan, the basic 

benefits. That does not mean they are not losers when pension 

plans terminate because they are no longer accruing future benefits, and they may lose some early retirement subsidies. But in 

terms of that basic benefit, the vast majority of participants have 

not been impacted by that, but there certainly are too many cases 

in which they have. 

Senator STABENOW. Thank you. 

Thank you, Mr. Chairman. 

Chairman GREGG. Now we turn to the man with the magic 

wand—

[Laughter.] 

Chairman GREGG. —the Chairman of the HELP Committee, Senator Enzi, going to straighten all this out. 

Senator ENZI. Thank you, Mr. Chairman. Thank you for holding 

this hearing. 

Director Holtz–Eakin, two months ago, my staff directed a fundamental scoring request to CBO, and that was what are the savings 

if we repeal the full funding exemption as it applies to the PBGC’s 

variable rate premium? Now, the answer to that one question affects all the other decisions that the HELP Committee makes in 

reaching its budget reconciliation instruction. Now, I know that 

dozens of other scoring estimates related to pensions have been 

issued from your office, some of them to my staff, many more to 

other committees. For my purposes none of them are as important 

as the one question that we asked 8 weeks ago. 

165

You do not need to explain why it has taken so long. I only want 

to know when the HELP Committee will get this critical question 

answered? 

Mr. HOLTZ-EAKIN. Knowing it is the most important thing you 

need to know, sir, as fast as we can. Thank you for letting me 

know. 

Senator ENZI. Okay. Thank you. Another question. In your testimony you speak of implied Federal guarantees that underlay the 

Federal insurance program of PBGC. You talked of the costs of 

pension failures being borne potentially by taxpayers. We can all 

imagine the scenario where your prophecy would be self-fulfilling 

it is mentioned enough. 

I join Senator DeWine, who is the Retirement Security Subcommittee Chairman, in asserting that a taxpayer bailout is not an 

option. I know that Chairman Boehnert in the House, and I feel 

certain that Chairman Grassley on the Finance Committee, shares 

that view that a taxpayer bailout is not an option. 

That being said, my question is this: Are you willing to assert 

here today that your prophecy of a taxpayer bailout is a certainty 

based on the budget numbers you have seen and considering all 

other options that are available to us, or are you just trying to get 

people’s attention? 

Mr. HOLTZ-EAKIN. Well, certainly not. It is a matter of the 

Congress’s decisions. What is certain is that there exists large 

scaled underfunding in defined pension system as a whole, that the 

current rules are such that many of those claims which show up 

at the door of Mr. Belt, and that in the future some of those claims 

will arrive at a door which has no resources behind it. And the 

question then will be: Who pays? Will it be the case that it will be 

the workers and retirees, or will it be some other mechanism? But 

that much we know. 

Senator ENZI. And if Congress takes some action, some decisive 

action, it is possible to avert all of those prophesies? 

Mr. HOLTZ-EAKIN. Yes. 

Senator ENZI. Some people are kind of confused with the savings 

& loan bailout that we had before, compared to PBGC. And I hope 

that people are helping to emphasize the fact that that was cash 

that people lost at that point, that that loss that they got immediately, as opposed to a pension which is over a number, a period 

of years, as they are supposed to earn it. There can still be some 

similar problems, but it is a much longer cash flow problem than 

the others, and I hope everybody will—I will have some questions 

in writing dealing with that one. 

We are working on a fix, and I think it is almost historical that 

the Finance Committee and the HELP Committee are working together to come up with a solution. There are kind of two ways that 

we can go. We can start fresh, which some people would say would 

be throwing out the baby with the bath water, or we can tinker 

around the edges. Now, hopefully there is a third way that will be 

a little bit more comprehensive than that, but the approach that—

this is for Brad Belt—the approach that you propose and the administration has proposed kind of falls in that first camp, throwing 

out the existing rules and trying something new. 

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what are the likely consequences if you are wrong, and the dictates of mark to market asset valuations and a near spot rate yield 

curve causes such volatility and unpredictability, that the strong 

plans terminate and the weak plans collapse? What happens then? 

Mr. BELT. A couple points in that regard, Senator Enzi. First, it 

is not the administration’s proposal that is causing any volatility. 

That risk and volatility is inherent in the pension plan itself. It is 

wholly a function of the business and investment decisions made 

by the company. They are taking on that risk and volatility 

through their decisions. What they are asking us to do is pretend 

it is not there and hide it from view. We are simply saying: ‘‘Let 

us expose that′′. Companies have full ability under current law, 

and they would have full ability under the administration’s proposal, including some additional incentives, to lower that risk and 

volatility should they choose to do so. If they want to volitionally 

bear that risk and volatility, that is up to them, but let us make 

sure those risks are understood and transparent and priced. 

To the point about whether we would drive them out of the system, I have heard that argument made. There are a couple of 

issues in that regard, and I pointed this out in response to Senator 

Stabenow’s question. The cost to exit the system for all the system 

stakeholders would be $450 billion. Whether they have those resources to be able to do that, to go out and buy annuities on behalf 

of all the participants is another question all together, but that is 

what the cost would be relative to what we are saying, which is 

some additional premiums, a measured way to fund up to get to 

fully funded, and numerous incentives, tax-based incentives and 

otherwise, to be able to contribute to their pension plan. 

Senator ENZI. Your argument suggests that all the companies 

ought to just invest in bonds to avoid volatility and I do not think 

that is going to be the answer to it too. 

Could I have just another minute? 

Chairman GREGG. Sure. 

Senator ENZI. I know that there have been some reference before 

to consider smoothing rules to be lies. Are they frauds on the 

American people? I ask these questions because some of the rhetoric we are hearing is that unless we throw out the current law, 

try something completely different, that we will be attacked as 

liars and do-nothings. If we do what you are asking, we will be attacked as dead set on killing the defined benefit system. 

So just so we know where you stand, do you believe that tightening the smoothing rules, as we have done in the Boehnert–Thomas bill in the House, is tantamount to lying to the American people? 

Mr. BELT. We believe, Mr. Chairman, that you need accurate 

measures of assets and liabilities at a point in time, market-based 

measures of assets and liabilities. Smoothing is not market-based. 

That is not accurate as of a point in time. That is saying what happened three or four years ago is relevant to today, but that is not 

the way that markets work. 

We believe that in order to best protect the benefits earned by 

workers and retirees, as well as best protect the American taxpayer, you need to have accurate measures of assets and liabilities, 

167

market-based measures of assets and liabilities, and a meaningful 

funding target. 

Chairman GREGG. Senator Murray. 

Senator MURRAY. Thank you very much, Mr. Chairman, for holding this really critical hearing. I do have an opening statement I 

would like to submit for the record. 

Chairman GREGG. Of course. 

[The prepared statement of Senator Murray follows:]

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Senator MURRAY. And let me just say off the top that it is pretty 

clear to anybody who reads the newspapers today knows that our 

current set of pension laws and rules do not adequately protect the 

retirement savings of our workers, and I believe to protect defined 

benefit pension plans we do need a stronger commitment to greater 

regulatory oversight of the investment service community and 

those responsible for the administration of pension plans across the 

country. 

I think it is just unrealistic to expect workers to adequately be 

able to protect themselves against reductions in benefits for themselves and their families because of the lack of timely information 

about their pensions that is currently provided to them, and it just 

appears to me that the current system is sort of stacked against 

workers and heavily skewed to corporations that can play fast and 

loose with inadequate rules and regulations, and I do not think the 

Federal Government ought to condone poor management decisions 

and pass the costs of corporate missteps onto loyal workers and the 

taxpayers. 

But having said that, I am hearing the numbers that you are giving us today and looking at the pension insurance data book that 

was recently released. A serious decline in numbers over the last 

four years, and I am kind of mystified by the fact that when you 

look at this, $38 billion in PBGC losses over the last 3 years alone. 

Why did this agency not face those kinds of deficits in the past? 

You know, from 1985 to 2002 the PBGC had a cumulative surplus 

of over $25 billion. Why was the agency able to remain in surplus 

during those times even when there were economic recessions during those times? 

Mr. BELT. I would have to check the records, look at the data 

book. I do not believe we have ever had a surplus of that size. I 

believe our record cumulative surplus was, in about 2000, a little 

over $9.7 billion. 

But to the broader point, I think what has happened is that we 

have had pension plans grow substantially in size over the last 30 

years. Simply the size of the pension plans, both the assets and liabilities, is much, much greater than it was. And then what you 

had was, coming into 2000, companies had been taking advantage 

of very robust market returns to avoid putting any cash into the 

pension plans for several years. They were able to ride asset gains. 

That all changed beginning in 2000. Asset prices fell by 25 to 30 

percent over a 3-year period. Interest rates also fell at that point 

in time, which increased the value of the liabilities. 

At the same time, companies were taking advantage of the 

rules—not breaking the rules, simply taking advantage of the loopholes in the rules—to in some cases make new benefit promises, 

notwithstanding the fact that they may have been in financial difficulty and the funding gap in the pension plan was increasing, to 

take advantage of things like smoothing, referred to by Senator 

Enzi, that hid from view the fact—hid from the workers and retirees as well as the markets—the fact that this gap was there and 

growing. And they were also able to use mechanisms like credit 

balances, which pretended that the previous value of assets was 

still there even though these were long eroded to avoid making any 

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tion of those factors over a 3- or 4-year period that caused not only 

PBGC’s deficit to go from $3.6 billion to $23 billion, but the underfunding gap to grow so precipitously to $450 billion, and the 

amount of reasonably possible claims to increase from $10 billion 

to $100 billion. 

It has just been a fairly dramatic change in a fairly short period 

of time, and what this has really done is disclose the problems, the 

structural problems in the pension rules. 

Senator MURRAY. The $25 billion that I referred to was cumulative over those years, 1985 to 2002. But having listened to what 

you just said, has Congress failed to provide adequate oversight 

during the last 3 years? 

Mr. BELT. The administration proposed and my predecessor and 

then Under Secretary of Treasury as well as the Assistant Secretary of Labor proposed in the summer of 2003 many of these reforms that we have before us now. We have gone much further, 

and Congress has not yet acted on those. We would hope that the 

Congress would move forward as soon as possible to enact these reforms so that the problem does not get even deeper in the intervening time. 

Senator MURRAY. Do you think that Congress should provide the 

PBGC with a stronger enforcement model, maybe something like 

the new and expanded authority that the SEC was given under 

Sarbanes–Oxley? 

Mr. BELT. I am not sure that the Sarbanes–Oxley model dealing 

with governance issues is quite appropriate for the PBGC, but 

there is no question—and we have talked about this before—that 

the PBGC has a limited set of tools available to it to enforce the 

provisions of Title IV. I would just simply contrast some of the tools 

available to the Federal Deposit Insurance Corporation, another 

Federal insurance entity. 

We have used the tool set that we have as aggressively as possible and as responsibly as possible to avoid losses and to enhance 

recoveries. But there certainly are limitations, and as we noted earlier, we have bumped up against the fact that—the positions we 

take consistent with ERISA are often trumped by what happens in 

the bankruptcy court. 

Senator MURRAY. Mr. Chairman, if I could ask just one really 

quick question, I have heard from a lot of United workers who live 

in my State who are obviously very, very upset about what is happening to their pensions system, especially the older flight attendants. Some of them are now saying, ‘‘We are going to have to fly 

until we die.’’ They do not believe they are ever going to have a 

pension. I think that is a serious concern for all of us. 

But I would like to ask you: Should the PBGC provide stronger 

financial protections for low-wage earners or those wage earners 

who are close to retirement, so if you are 50 and you expect to retire in a few years, you have, a much shorter amount of time to 

be able to recover from impacts like this? 

Mr. BELT. That is obviously a policy decision for the Congress to 

make. That is not anything we have current authority to do. The 

only point I would make is that if you raise the maximum guarantee limit or you somehow provide a mechanism providing additional benefits beyond those contemplated by current law, it simply 

171

raises the price tag of the insurance program. And then the question we have been discussing this morning is ultimately who pays 

for that. 

Senator MURRAY. Thank you very much, Mr. Chairman. I appreciate the hearing. 

Chairman GREGG. Thank you. 

I would like to try to put in context the way I see this problem, 

and tell me where I am wrong. Defined benefit programs guarantee 

a return. They say you are going to get X amount, and that is the 

difference between other programs. A 401(k) you invest, and if your 

investment does well, you get what the investment return is; if it 

does poorly, you get less. A defined benefit plan says you are going 

to get a certain amount back. And, therefore, the assets should 

match to generate that return, and it is totally predictable from the 

standpoint of actuarial accounting. And if it were an insurance 

fund which was being monitored by a State and the assets did not 

match the risk of the insurance, which was actuarially predictable, 

the State government would step in and say you, insurance company, must correct your fund to match. 

So I sort of look at this issue in that context, and looking at it 

in that context, it seems to me that what we need are rules that 

say, A, that the companies that make promises to their employees 

and the employees who seek those promises through collective bargaining negotiations have to be honest that the assets are going to 

match the promises that are going to be put into the fund; and that 

you as the PBGC and the Government should have rules which require companies and the unions which support the contracts to put 

those assets in, and that the assets should be predictable. And it 

gets to the point that Senator Enzi was making, which is: Is it equities or is it bonds? But whatever it is, it should not be speculative 

and it should not be risk based. It should be predictable return on 

assets to match the benefit. 

Where we disconnected was that in the 1990s with the market 

doing so well, many defined benefit plans decided to move into the 

risk business and position themselves like contribution plans where 

because they were getting such a good return on their investment 

and they thought that they could basically pursue it that way, 

rather than effectively matching with predictable returns assets 

which had long-haul return rates which would match their benefit 

structure. 

And so my sense is that as we try to correct this, we have got 

a two-level problem: first, we have to fix what we know is the 

issue, the $23 billion; and, secondly, we have to restructure the 

way companies fund the defined benefit plans for the future so that 

there is transparency, so that people know what the benefit is they 

are going to get, and so that we know that there are assets behind 

those benefits to support them which are predictable and have 

long-term returns. 

Is that an incorrect way to see this issue? 

Mr. BELT. I think it is a very thoughtful and thorough analysis, 

Mr. Chairman, and it is actually a point that Federal Reserve 

Chairman Greenspan made just the other day as well in his testimony before the Joint Economic Committee. 

172

Chairman GREGG. Well, I did not hear that testimony. I wish I 

had. I would not have understood it, anyway. 

[Laughter.] 

Mr. BELT. Congress can decide what limitations it wants to put 

on. I think the important point to note is that there is risk. And 

how is that risk reflected and how is it priced? Whether you want 

to have assets matched against liabilities or allow companies the 

flexibility to take additional risk, as long as that risk is understood, 

transparent, and priced, may be the appropriate policy tradeoff. 

You can dictate or you can allow flexibility, but understand that if 

you are 100 percent funded but you are taking a lot of risk, there 

is risk there. You may not be 100 percent funded the next day. Unless you adopt—

Chairman GREGG. The employee needs to understand that. I 

mean, they need to understand if that is the type of defined benefit 

plan they have negotiated or joined, they may get nothing at the 

end of the day if that is going to be a risk-based plan as versus 

a traditional defined benefit plan, which gives them a guaranteed 

return with guaranteed assets underneath it that support that, 

right? 

Mr. HOLTZ-EAKIN. And the mirror side of that is the employer 

needs to appropriately reflect that risk in their decisionmaking. 

And you can either hedge the risk internally, your strategy, or you 

could pay for that risk, either internally by overfunding the plan 

so that if things go bad, it is there, and the shareholders have 

given up those dividends and they are in the pension plan; or you 

can pay Mr. Belt more for the insurance, but you reflect the price 

of that risk somewhere in the decisionmaking. 

Chairman GREGG. What we need is a set of rules that accomplish 

that, and we do not have them right now. 

Mr. BELT. It is interesting how, if you talk to any CFO of any 

industrial company, they are making these kinds of decisions every 

day with respect to raw materials, prices, currencies, and other 

things. They are making a decision: Do I want to stay exposed to 

price changes next year, 2 years down the road, or do I want to 

hedge those risks today? That is an issue that the airlines are facing with respect to fuel cost. Southwest, the reason it is doing relatively better than its brethren, is it hedged its fuel price cost. It 

decided it did not want to see what prices were going to be down 

the road. It said, ‘‘I want to lock those in today.’’

You have the ability to do the same thing with respect to pensions. 

Chairman GREGG. Thank you. 

Senator Conrad, did you have any further questions? 

Senator CONRAD. I do. Just briefly, if I can, Mr. Chairman. 

Chairman GREGG. Yes. 

Senator CONRAD. I want to go back to this credit balance problem 

because it really is stunning when I look at what has happened. 

Mr. Belt, you said in your testimony, ‘‘Funding rules allow companies with unfunded pension liabilities to take funding holidays or 

reduce their required contributions. Under current law, companies 

can build up a credit balance by contributing more than the minimum required or by favorable investment performance of pension 

assets. They can then treat the credit balance as an offset to the 

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funding requirement for the current year. This allows a plan to 

take a contribution holiday without regard to whether the additional contributions have earned the assumed rate of interest or 

have instead lost money in a down market, and regardless of the 

current funded status of the plan.’’

You go on to say, ‘‘The result is some sponsors are able to avoid 

making any contributions to plans that may be hundreds of millions or even billions of dollars underfunded.’’ And you then cite a 

GAO study: ‘‘On average, 62 percent of the 100 largest plans each 

year received no cash contributions, including 41 percent of plans 

that were underfunded.’’

Why, you talk about an absolutely bizarre system, this is it. You 

talk about a system designed to fail, this is it. 

Bethlehem Steel made no contributions to its plan for the 3 years 

immediately preceding plan termination. US Airways made no contributions for the 4 years immediately before termination. 

First of all, Mr. Belt, thank you for providing this in your testimony. Second, what do we do to stop this charade? What an absolutely bizarre system that allows people to not make contributions 

when they are substantially underfunded based on some notion of 

a credit balance that has no connection to reality. What is your 

sense of how we stop that? 

Mr. BELT. Enact the administration’s proposal, which would do 

away with credit balances. But if I may make one additional point 

in that regard, the critics of the administration’s proposal to eliminate credit balances will argue that if you do not allow credit balances, they have no incentive to put in more than the minimum. 

Senator CONRAD. And that was the notion of credit balances to 

begin with, that this was going to incentivize companies to make 

additional contributions. 

Mr. BELT. That is correct. 

Senator CONRAD. What went wrong? 

Mr. BELT. Well, multiple problems, but they took advantage of 

the situation to avoid putting in cash when it was most needed. We 

believe there are ample incentives under the administration’s proposal to put in more than the minimum. Number one, you shorten 

that 7-year amortization period. Just like when you make an extra 

contribution when you are paying your mortgage, the mortgage 

lender does not allow you to skip next month’s payment. It shortens the 30 years. 

Secondly, dollar for dollar under the administration’s proposal, 

you would reduce the amount of variable rate premium you would 

have to pay since it is tied to underfunding. The more you fund up, 

the lower the funding gap, the less you would pay in premiums. 

And, third, we provide, again, as we talked about before, a substantial additional tax incentive relative to current law to fund up 

your pension plan beyond the minimum because you get to shelter 

current income. 

So we believe that there are substantial incentives in place, 

apart from the question of whether any incentive should be needed 

to prudently fund the pension plan. 

Senator CONRAD. Dr. Holtz–Eakin, Director Holtz–Eakin—both 

apply—what is your reaction to what you have just heard here 

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tion’s recommendation, anything that CBO can add to this discussion or understanding? 

Mr. HOLTZ-EAKIN. This is one of a whole series of issues that 

comes under what we hope to cover under pricing things to market. 

Revealing the market value of the assets and the liabilities is very 

important. I know there is concern about volatility when one does 

that, but I think it is important to distinguish between the volatility in those assets and the volatility that any premium payments 

might have as a result. 

In a homeowner’s policy, there is a lot of volatility. The house is 

either there or burned down. That does not mean the premiums 

are $100,000 or zero. So what you want to do is reflect the value 

of the assets and show the status of the plan, and then have a premium stream that reflects the risks associated with that. And there 

could be quite stable. But this is part of really reflecting the valuation in the assets. 

Senator CONRAD. Thank you. 

Chairman GREGG. Senator Enzi, did you have any follow-up 

questions? 

Senator ENZI. Thank you, Mr. Chairman. I really appreciate the 

brief summary that you gave on how all this works. 

Chairman GREGG. I did not understand it. 

[Laughter.] 

Senator ENZI. Oh, I think you did. One of the things that happens with investments, yes, executives do make decisions on a 

daily basis on what is going to happen in all of the markets that 

they deal in. Some of the markets are more predictable than the 

investment market. And if they go into just a system of bonds, they 

know that that is a very limited return. And the market has been 

extremely good in other investments, and everybody changed to 

other investments instead of bonds and were considered pretty stupid if they stayed just with bonds. Now, bonds are predictable, but 

I think they made normal business decisions based on those investments, and those investments paid off for a long time. They were 

generating enough revenue in additional value that kept the fund 

solvent. That is why people did not make additional contributions 

to the plans. They were showing, at least on paper, a sufficient return that they were funding their plans well and were pleased that 

they were able to do that, and that also allows them to put some 

of their other assets into productive things within the business so 

that the business can continue to expand and grow and pay the 

kind of dividends that will make people want to invest in their 

business. 

I asked about the smoothing earlier, and I am still concerned 

about the fact that if we eliminate all of the smoothing, the strong 

plans will terminate and the weak plans will collapse. And I think 

it is a lot of weak plans that make up that $450 billion that we 

are talking about. Not all, but a lot of that. 

So can’t smoothing also provide a transition between two asset 

values as we go from one system to virtually a brand-new system, 

Mr. Belt? 

Mr. BELT. Senator Enzi, I would distinguish between what I 

characterize as the inputs, understanding the value of assets and 

liabilities, versus your contribution requirements, the outputs. If 

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the concern is about contributions maybe bouncing around because 

of what is happening on the asset and liability side and you do not 

want to impose any strictures on how you invest assets, let’s just 

understand what the risks are. Let’s understand what the value, 

the market-based value, of assets and liabilities is at any given 

point in time. If you want to put some Governors on the contribution side, that is, the contributions requirements may not spike by 

100 or 200 percent in a given year, I think that is a reasonable discussion or conversation to have. 

What I would find troubling is to look back in time and say that 

the market and economic conditions that existed 2, 3, or 4 years 

ago are at all relevant to where we are today in the decisions that 

need to be made in the future. So that is why we feel very strongly 

that you need to price assets and liabilities on a current market 

basis; otherwise, you are just simply not going to have an understanding of what the risks are in the system and how to deal with 

those appropriately on a go-forward basis. 

Senator ENZI. Thank you. I will shift gears here pretty quickly. 

Dr. Holtz–Eakin, could you discuss how CBO scores premium increases? Your previous testimony indicates that the administration’s proposal to raise the fixed-rate premium per participant from 

$19 to $30 per year within indexing would reduce 10-year economic 

costs by $3 billion. However, preliminary scores from various policy 

options my staff have requested from CBO saves money over 5 

years, but actually reflect a cost in years 5 through 10. Can you 

give a little explanation? 

Mr. HOLTZ-EAKIN. There are two different conceptual bases for 

those calculations. One are the scores that you receive from the 

CBO for purposes of marking up legislation. They are done on a 

traditional cash flow budget basis, and those are distinct from the 

economic valuations that we presented today for the kinds of pricing of overall markets risks and exposure to pension underfunding 

that are really underneath our financial market writing a check for 

pension insurance. Those are conceptually different, and they are 

numerically different as a result. And everything that you will get 

for your committee will be traditional budget scoring, absent market risk, done on a cash flow basis. 

Senator ENZI. Thank you. My time is up. 

Chairman GREGG. Senator Byrd, you have been very patient. 

Senator BYRD. Well, thank you, Mr. Chairman. I want to thank 

you for conducting this hearing. It is obvious from the questions 

that have been asked there are great concerns here, and I want to 

thank our two witnesses for their very helpful responses. 

If I may very briefly ask a question, I think about the 50-yearold steelworker who has earned a pension that was supposed to 

pay $3,600 a month, and when his company filed for bankruptcy, 

that worker was forced to accept a $1,200-per-month pension, onethird of what that worker had expected. And these workers—we 

have plenty of them who are in this kind of situation—as well as 

their families and communities, pay a terrible price when their 

companies shed their pension obligations. 

What additional protections should the Congress consider to further protect those workers whose pensions are assumed by the 

176

PBGC? And, furthermore, what happens if those reforms do not 

work? 

Mr. BELT. Senator Byrd, the administration believes that promises made to workers should be promises kept, so we want to make 

sure that we have a funding and premium and transparency regime in place that makes sure that there are sufficient assets in 

the pension plan to cover the liabilities so you do not get to the 

point where there is this risk of losing hard-earned benefits. That 

is not acceptable. 

And if there are issues with respect to the health of the financial 

sponsor or the pension plans, it is important that workers and retirees, that investors in the company, and regulators have information, relevant, timely information on a market basis so we understand those risks. Ultimately it is a question of tradeoffs. And I 

think Dr. Holtz–Eakin has outlined extraordinarily well the policy 

tradeoffs, the choices facing Congress. Who pays for the promises 

when these promises are not kept? We believe that the starting 

point is let’s strengthen the funding rules, let’s make sure that 

there are sufficient assets in there to cover the liabilities so we do 

not have these problems because, otherwise, you have workers and 

retirees losing benefits. Responsible companies that have honored 

their promises are on the hook, and the taxpayer may be on the 

hook. We do not want that to happen. As I indicated in my oral 

statement, we think that is the best insurance policy for everybody. 

Senator BYRD. What happens if your reforms do not work? What 

happens if the company leaves the system? What is the safety 

mechanism for workers? 

Mr. BELT. Hopefully the company will honor its pension promises 

to workers and maintain its pension plan, in which case if they 

maintain the pension plan, then workers are receiving all the benefits that were promised to them. When PBGC assumes responsibility for a pension plan, under current law we are required, as established by Congress, to impose a maximum limit on guaranteed 

benefits, and that is $45,000 a year for somebody retiring at age 

65, just like in Social Security; if you retire earlier than then, your 

benefits are actuarially adjusted downward, if you are still under 

65 when the plan terminates. 

So there is no question that in some cases workers in the steel 

industry, in particular, have retired at an earlier point in time, and 

that actuarial reduction downward from age 65 down to age 50 is 

dramatic. That is the law that is currently in place. 

If it were otherwise, if you paid them all the benefits they had 

accrued and did not have the actuarial cutback, which would be a 

policy change Congress could put in place, it should be noted that 

the $23 billion hole would not be $23 billion. It would be much, 

much greater than that, and ultimately it does come back to the 

question who pays for that. 

Senator BYRD. What safety measures should the Congress consider to further protect workers’ pensions in such circumstances—

circumstances in which the companies are forced to contribute 

more to their pensions and businesses as a result decide to shed 

their pension obligations in bankruptcy or through other means? 

Mr. BELT. Senator, I can only go back to the earlier point, which 

is let’s make sure that we have strong, robust funding rules in 

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place. Let’s make sure we have transparency throughout the system so everybody understands what the costs and risks are at any 

point in time, and let’s have a premium structure in place that encourages good behavior, discourages risky behavior. And we believe 

that adopting those core principles, we will get to where we need 

to be, that is, protecting the benefits that have been earned by 

workers and retirees. 

Senator BYRD. Thank you, Mr. Belt. I think you have been a very 

fine witness. And thank you, Dr. Holtz–Eakin. 

Thank you again, Mr. Chairman. 

Chairman GREGG. Thank you, Senator. 

We thank you very much, gentlemen. I found this extremely informative, and I know that Senator Enzi intends to aggressively 

pursue reform in this area, and I certainly appreciate the Chairman’s participation in this hearing. And we look forward to working with you to try to make sure the reform accomplishes the goals 

that you have outlined, which is that fewer pension funds end up 

in your account, Mr. Belt, and that workers who have worked hard 

get their pensions. 

Thank you, and the committee is adjourned. 

[Whereupon, at 11:58 a.m., the committee was adjourned.]

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Responses to Senator Bunning’s Written Questions for Douglas 

Holtz-Eakin

Question 1.

With the recent upswing in the economy, the markets have been recovering to 

some degree. How will this recovery affect plan underfunding levels?

Answer. Given the heavy investment in equities by many pension plans, a rising 

stock market will reduce underfunding. However, the substantial allocation of fund 

assets to stocks also means increased underfunding when the markets fall.

Question 2.

One proposal of the Administration and the PBGC is an increase in premium payments. Has anyone tried to determine if, and if so, how many, companies might drop 

their pension plans altogether if those premium increases go into effect?

Answer. Although it is extremely difficult to predict how sponsors might react to changes in premiums, the proposed change in the fixed premium from $19 to $30 

per participant per year would increase pension labor costs by less than 1 cent per 

hour worked. Changes of that magnitude seem unlikely to affect the decision to retain or drop a pension plan. Increases in the variable-rate premium, however, could 

be quite costly for plans that are underfunded.

Question 3.

The current budget resolution calls for approximately $6 to $7 billion in savings 

from the PBGC. What mix of policy proposals do you think can be implemented and 

that the market can absorb in the next five years to meet this target?

Answer. CBO estimates that higher premiums, a limit on the share of pension 

plan investments allocated to equities (rather than bonds), accelerated correction of 

underfunding, and a reduction in the discount rate used to calculate pension liabilities could produce that level of savings.

Question. While $7 billion is not enough to meet the PBGC deficit, do you believe 

it will buy more time for the Congress to act? Or, have we already reached the tipping point where much more dramatic changes are required?

Answer. PBGC’s shortfall consists of an accumulated deficit (about $23 billion) 

and prospective net costs over the next 10 years that are more than double that 

amount. Prospective net costs are potentially avoidable through changes in the 

terms of the insurance. Thus, urgency is more likely warranted on the basis of 

avoiding losses rather than the threat of a collapse of the defined-benefit insurance 

system.

Question 4.

To what extent do you believe underfunded pensions are product of the weak 

stock market of the past few years? 

Answer. The decline in the stock market played a significant role in the rise of 

underfunding in defined-benefit pension plans. However, so long as pensions plans 

are heabily invested in equities, the system will continue to be vulnerable to market 

disturbances. Stock market declines and bankruptcies by sponsors tend to occur at 

the same time in response to the same economic changes. Thus, PBGC is likely to 

see an increase in plan termination precisely when underfunding is most prevalent.

Question. Do you think that as the stock market continues to recover, we will 

see a decrease in the number of underfunded pensions insured by PBGC?

Answer. Yes. But future declines in the stock market are also likely. A continuously rising stock market is not a reliable solution to the financial difficulties of the 

defined-benefit pension system.

Question 5

I understand that the CBO recently made projections about the possible deficit 

of the PBGC in 10 and 20 years.

Answer. To clarify, CBO’s projections of the net costs of federal pension insurance 

are not projections of PBGC’s deficit. Rather they are measures of the estimated 

market price to insure all covered benefits of currently operating plans under current premium and funding rules over a specified period. The estimates do not correspond to a projected deficit for PBGC because the agency does not purchase insurance at market prices.

Question. Can you tell us what assumptions went into that estimate of a $71 

billion deficit over the next 10 years?

Answer. CBO’s projections require numerous technical and economic assumptions. Most of those are described in detail in the CBO paper The Risk Exposure 

of the Pension Benefit Guaranty Corporation (September 2005).

193

Question. How did you determine which plans you thought the PBGC might take 

over?

Answer. CBO projects the bankruptcy probabilities of sponsors of defined-benefit 

pension plans. CBO assumed that PBGC would take over all plans of bankrupt 

sponsors.

Question. How can you make accurate predication with so many unknowns?

Answer. CBO attempts to project the most likely direction of change in costs 

under current policy rather than a precisely accurate prediction. Nonetheless, CBO 

has subjected the estimates to a variety of checks for robustness. For example, the 

agency’s projections of bankruptcies by sponsors are consistent with historical failure rates for firms of each major credit rating.

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Responses to Senator Bunning’s Written Questions for Bradley D. 

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(203)

HEALTH INFORMATION TECHNOLOGY: THE 

FEDERAL ROLE AND BUDGET IMPLICATIONS 

WEDNESDAY, JULY 20, 2005

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 10 a.m., in room SD–

628, Dirksen Senate Office Building, Hon. Judd Gregg, chairman 

of the committee, presiding. 

Present: Senators Gregg, Allard, Enzi, Ensign, Conrad, Murray, 

and Stabenow. 

Staff present: Scott B. Gudes, Majority Staff Director; and Mary 

Ann Naylor, Staff Director. 

OPENING STATEMENT OF CHAIRMAN JUDD GREGG 

Chairman GREGG. We will convene the hearing of the Senate 

Budget Committee. 

We are honored today to have joining us the Secretary of Health 

and Human Services. The Secretary has a long and extraordinary 

career of public service, as we all know, and has focused the Department on a lot of critical issues to our Nation, but none more 

critical than delivering better health care, and as part of that exercise, of course, the issue of how the health care delivery system of 

our country uses its information is critical, and especially information technology. 

Information technology has been discussed at a variety of different hearings that we have held, and has been discussed at considerable length in a number of different arenas, received a lot of 

attention from the President of the United States, and also during 

the Presidential campaign. It is I think generally admitted, agreed 

to, that if we do a better job of developing and managing information, using technology, that we can significantly reduce the overhead cost of the health care community and delivery of health care. 

There have been representations that up to 20 percent of the 

overhead of the health care community could be dramatically reduced if we were able to get better technology in place. We know 

that during the campaign Senator Kerry was fond of using the example of how he would go to have his car fixed, and be able to go 

to any number of dealerships and have the dealerships call up the 

history of his car and what the problems were and have an instant 

response, and yet when he went in to get health care he had to fill 

out a bunch of paper forms and nobody knew what his history was. 

In other words, it would have been much easier to have people 

carry around a credit card with their information on it. That is just 

204

one example of how technology could significantly impact health 

care. 

So we are looking forward to hearing from the Secretary today 

as to the advances that the Department has been making in the 

area of bringing the health delivery system into the 21st century 

relative to technology and the application of technology, and we appreciate he has taken the time to come testify. 

I would turn to the ranking member of the committee, Senator 

Conrad. 

OPENING STATEMENT OF RANKING MEMBER KENT CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. 

Thank the Secretary very much for being here. This is a critically 

important subject. 

Back in the 1990’s I co-founded the Telehealth Caucus here in 

the Senate. We have been very active ever since, and we have also 

focused on the whole question of information technology and the 

opportunities that presents. 

I would like to just go through a couple of slides quickly, kind 

of setting the context for this discussion if we can, and then have 

a chance to hear from the Secretary.

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This is what is happening to health care expenditures in the 

United States. They continue to rise. We are now, last year, 15.4 

percent of gross domestic product, by far the biggest percentage of 

our national income going to health care of any of the industrialized countries.

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This is what the chairman and I are, I think it is fair to say, 

most concerned about, and that is the trend line for Medicare and 

Medicaid expenditures. As we see going forward—we are looking 

out to 2050—and the long-term outlook according to the head of the 

Congressional Budget Office, according to the head of the General 

Accounting Office, we are headed for a circumstance, if current 

tend lines continue—and I want to emphasize that—we would be 

spending 21 percent of GDP just on two programs. That is more 

now than we spend on the total of the Federal Government. This 

is the enormous challenge that we face.

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This to me is one of the things that requires us to focus like a 

laser. 6 percent of beneficiaries are using 51 percent of the money. 

At times it has been 5 percent using 50 percent of the money. And 

who are they? They are the chronically ill. They are people who 

have multiple conditions, and that is what presents us, I believe, 

with our biggest opportunity. This is where we can get the biggest 

bang for the buck in terms of savings for Medicare and Medicaid. 

It is also the place where we can most dramatically improve health 

care outcomes. So I think we really need to rivet our attention on 

this statistic and the reality of people’s lives behind those statistics, 

chronically ill, people who have multiple conditions. Their care is 

not being well coordinated now. As a result, they are subjected to 

multiple tests. They are also taking many too many prescription 

drugs, many times actually making them less healthy rather than 

more healthy.

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The administration’s framework for IT infrastructure emphasizes 

electronic health records, computerized treatment options and best 

practices easily accessed by doctors, computerized health assessment and treatment recommendations from doctors, electronic 

health information, patient data exchange. I think the administration has been quite right to focus on those areas of opportunity. 

As I have talked to health care providers around the country, as 

I have talked to people running major health care companies, they 

tell me they think there is an enormous cost multiplier here, cost 

savings multiplier, by using best practices, and it is simply not 

happening. There are huge management opportunities, places 

where we can save substantial sums of money and improve the efficiency of health care.

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What are the benefits of information technology and health? Reduction in medical errors. We have just seen a national survey on 

medical errors, really quite stunning, the number of errors that are 

occurring in some of our very best facilities. And we all know how 

it happens, you know, charts that cannot be read, charts that are 

not available at the key location at the right time. 

Improvement in access to health care, improvement in coordination of care. And I want to emphasize the last one if I can, improvement in coordination of care. I have said this to my colleagues 

many times. I will say it again. I truly believe one of the biggest 

opportunities we have is with the small percentage of those who 

are eligible for Medicare and Medicaid, roughly over time 5 percent 

who use 50 percent of the money. We need to better coordinate 

their care. 

We did a pilot with some 21,000 patients, and we found out, 

when we put a nurse practitioner in every one of their cases, first 

thing they did was go into their homes, lay out all the prescription 

drugs they were taking. All too often they found they were taking 

16 or 17 prescription drugs, and half of them they should not have 

been taking. 

It happened with my own father-in-law. I went into his house, 

laid out all the prescriptions he was taking. He was taking 16. I 

got on the phone to the doctor. I went down the list. About the 

third drug I mentioned, he said, ‘‘My God, Kent, he should not be 

taking that. He should not have been taking that the last 3 years.’’ 

I went further down the list, and with two drugs he was taking, 

he said, ‘‘He should never take those drugs together.’’ I said, ‘‘Well, 

doctor, how does this happen?’’ He said, ‘‘It is very easy how it happens. He has a lung specialist, a heart specialist, he has an orthopedic doctor. He has me as his family practice doctor. He is getting 

medications at the hospital pharmacy, at the corner pharmacy, at 

the pharmacy down at the beach, mail order several pharmacies. 

Nobody is coordinating it.’’

Chairman GREGG. He was probably buying in Canada. 

Senator CONRAD. He probably was. The problem was nobody is 

coordinating. He was sick and confused. His wife was sick and confused, and that is how it happens. We have to do a better job of 

making certain that this care gets coordinated because we will get 

better health care outcomes and we will save money. 

With that, I thank the Chair. 

Chairman GREGG. Thank you, and your points are absolutely 

well taken, and we look forward to the Secretary telling us how we 

are going to make some progress in this area. 

We turn to the Secretary for a statement. 

STATEMENT OF HON. MICHAEL O. LEAVITT, SECRETARY, 

DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Secretary LEAVITT. Thank you, Mr. Chairman, and also, Mr. 

Conrad, thank you members of the committee. 

My prepared opening statement is somewhat redundant to what 

has been said, and so I would just like to submit it for the record 

and just reemphasize a couple of points if that would be permissible. 

Chairman GREGG. Whatever was you want to approach it. 

215

Secretary LEAVITT. That is what I would like to do. 

What I have heard you say basically between the two of you is 

that this is really about lower cost, it is about fewer medical mistakes, it is about better care, it is about patients having less hassle 

in addition to it. 

I would just add one more to the list, and that would be it is 

about having a more secure Nation as well. There are quite profound implications with respect to our preparation for bioterrorism 

events as well as pandemic events that we are now working to prepare ourselves for as a country. 

Senator Conrad mentioned the need for laser focus. I would like 

to suggest that the place for our laser focus is on interoperability 

of systems. We do have to deal with the issue of how we provide 

access of adoption among the broad medical community. That is 

clearly part of the discussion. But until we have developed a means 

of being able to allow our systems to speak together, to talk, to be 

interconnected, we will not get the profound benefit that is available. 

Another point I would make is that we have now in place a very 

clear strategy to achieve interoperability. We have deployed recently the American Health Information Community. I would like 

to describe for you what our strategy is in simple terms. The national Government agencies, the programs that you referenced, as 

well as some others, if you take Medicare, Medicaid, the Veterans 

Administration, DOD, the Indian Health Service and, if you add 

the Medicaid component in the States, among that group, we fund 

publicly about 46 percent of all health care in this country. 

Our strategy is very simple. Let us bring together all of the Federal agencies and have them begin operating with a set of common 

standards, recognizing that we will move the market when we do 

that. We have gone to the private sector and said, ‘‘We need you 

to help us develop these standards.’’ Over the course of the next 

several months we will develop the standards, and believe at that 

point in time, once the standards are in place for interoperability, 

we will begin to see quite profound progress and some specific 

breakthrough projects. 

I can see a time where the medical clipboard will be a thing of 

the past. When you walk into a clinic, the first thing they hand you 

is a clipboard, and over and over and over again, you fill out the 

same information. The whole idea of medical mistakes—we have 

all had experiences with this—we can eliminate them. 

I would also like to just add that many of the other issues that 

we deal with together will be affected by this. The profound growth 

of Medicaid and Medicare will not ultimately be stemmed until we 

are able to get controlled health care costs, and information costs 

are a major part of it. The whole idea of physicians’ reimbursement 

is an issue that we will, I am sure, talk about today, one that is 

of great concern to the medical community. A big part of that, in 

my judgment, is the capacity to begin paying physicians and providers on the basis of their performance and their outcomes as opposed to just treatment. All of this is about a major shift from 

treatment to health. 

One of the concerns I mentioned earlier—I will just highlight it—

is bioterrorism. Currently, as we exercise on bioterrorism events, it 

216

becomes quite evident that a significant problem in the early part 

of any incident is determining if an incident has occurred, how 

broadly it has occurred, and what it is. 

One of the early benefits of an interoperable health IT system 

will be linking together emergency rooms so that we have information very early in those incidents to determine where they are. The 

same will be true for pandemics. 

If I could make one direct appeal to you today, it would be, as 

this committee deals with this issue, that we recognize that the important laser focus has to be on achieving interoperability. Yes, we 

need to deal with adoption, and we will, but until we have achieved 

those standards, dramatic expenditures on health information technology will not achieve, in and of itself, the vision that I have 

heard many of you espouse. 

[The prepared statement of Secretary Leavitt follows:]

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That concludes my opening statement, Mr. Chairman. 

Chairman GREGG. Thank you very much, Mr. Secretary. We have 

this issue of interoperability at a lot of different levels in the area 

of homeland security. We cannot get the State police to talk to the 

local city police in most of our States in this country. So I guess 

my question is, how do you get over this? I was talking to the head 

of my largest hospital, not my largest, but one of my larger hospitals, just so he is not designated. And they do a lot of things. 

They have a long-term care facility. They have a heart center. They 

have a cancer center. They have a center for battered women. And 

he was saying that one of his biggest problems is that his computer 

systems within his own hospital cannot communicate with each 

other. 

So how do you ever—when we cannot even get the police to agree 

on a bandwidth to deal with spectrum, how do we get the health 

community, which is a matrix of incredible complexity, to come up 

with simple protocols to allow, for example, a single way to develop 

pharmaceutical requests or a single way to present the basic health 

care information that everybody has such as blood type? How do 

we do that? 

Secretary LEAVITT. Senator, let me just indicate I have experienced the difficulty that you reference with respect to bandwidth. 

While I was Governor of Utah, we were preparing for the Olympics. 

We had 7 years to prepare to get our radio communications to all 

be on the same system. It took us all 7 years to get there. World 

War II was fought in half that time. We can do better, and we have 

to do better on this subject. 

Here is our strategy. We recognize that it is going to require—

we recognize this is a place for some Federal leadership. Between 

Medicare, Medicaid, Indian Health Service, VA, DOD, we pay for 

about 35 percent of all health care in the country. If you add State 

Medicaid and other Government programs, we are 46 percent of 

the market. So the strategy is, step one, to in essence bring all of 

the Federal programs together and say we are going to adopt 

standards of interoperability. 

Chairman GREGG. Can I interrupt? For example, are you going 

to have a standard that every doctor who executes a prescription 

under Medicare or in the veterans facilities or in an Indian health 

facility, that prescription has to be typed out as versus being handwritten? 

Secretary LEAVITT. We are moving toward an e-prescribing 

standard. We are not going so far as to say every one of them has 

to be handled that way. We are using it in a more voluntary adoption basis, but very shortly, we will put forward e-prescribing 

standards that will allow the systems of various medical providers 

to integrate so that there is a tremendous advantage. 

Over time it will I am sure create lots of incentives for people 

to do that. So the answer is that is precisely the direction we are 

following, and it is a good example. 

If we can bring together the VA, the DOD, Medicaid, Medicare, 

and say, ‘‘Here are the standards we are going to adopt, and in 

time we are going to expect all who do business with us to adopt 

the same interoperable standards.’’ We know we will move the 

market. 

230

We want to do it in the proper way, so we have invited the vendors, the medical providers, the entire private sector by saying, 

‘‘Help us develop these standards.’’ We are moving in a rapid way 

now to develop standards that will ultimately be deployed both in 

public but also then in private settings. 

Chairman GREGG. A secondary issue here is that as you move to 

these standards you get into questions of sharing patient information, and error information within hospitals, and physician delivery 

systems. Now, we, last year, passed something called the Patient 

Safety Act. It has passed Senator Enzi’s committee already, and 

the House, I understand is actually going to mark it up this year—

they stopped it last year. But do we not have to have some sort of 

an understanding of protocol, an understanding so that this information, when we create these data bases that are going to try to 

be universal and address issues like errors, are protected from 

being abused or used overly aggressively so that there is a chilling 

effect on them by the trial bar. 

Secretary LEAVITT. Confidentiality, privacy, and security need to 

be first principles of this effort. Those are problems we are dealing 

with in many aspects of our society, but in no place is it more sensitive than it is with information, with health information technology. 

HIPAA was an important step forward with respect to health information. The Congress provided that States could have more 

stringent standards. We now have more than 30 States who have 

adopted different standards. So one of the elements of creating 

interoperability is not just the technical aspect of being able to get 

the computers to talk together, it is getting the people to work together too by harmonizing the standards and having ways in which 

we can accommodate all of those different standards of privacy. So 

you are absolutely correct. 

And, we have recently put out an RFP, inviting the States to 

help us find the differences so we can harmonize in that effort. It 

is a first priority. 

Chairman GREGG. Senator Conrad? 

Senator CONRAD. In this area you want us to focus like a laser 

on, interoperability, I have had legislation that would create what 

we would call a National Emergency Telemedical Communications 

Act, and it would provide $150 million for three State consortia to 

set up networks that could connect CDC in an interoperable way 

with major hospitals and major clinics, and law enforcement. So 

that if we, God forbid, had a bioterrorism event, we would have a 

communications network that has been tested and vetted and was 

interoperable. 

I would hope very much that the administration would support 

that legislation, or comparable legislation. The important thing 

here is that we really go down this trail and go down it quickly. 

One of the things we learned on September 11th, if you go back 

and look at the analysis of what happened at the Pentagon, the No. 

1 problem was the lack of interoperability of communications. So 

the first responders—and the Chairman had it just right—they 

could not talk to each other. You had police, you had medical, you 

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sponding, fire as well. They could not talk to each other. It created 

a massive confusion. 

It seems to me the way to address this is to begin with manageable sized groups and link them, and put the money into running 

tests. The reason we came up with the idea of having three different consortia was to test different methods, put them in competition. I think that is what we ought to do with all these things, test 

and compete. And that was the idea here. Let three groups go out 

there and test systems and compete against each other, and see 

which one works best before we try to lay it out nationally. 

I think every time we have gone and tried to lay something out 

nationally without testing it, we have wasted a lot of money. So I 

hope very much that we will pursue that. 

I also wanted to ask you very specifically, as we try to focus on 

this question, do you have some other idea of how to actually create 

networks that are interoperable, that test the theory? 

Secretary LEAVITT. Senator, we are currently engaged in a 

project we call BioSense. We have identified the 36 most sensitive 

cities from a bioterrorism standpoint, where we believe the risks 

are the highest. We are beginning to work, I might add, aggressively to link up what I believe are 421 emergency rooms, starting 

with development of standards of interoperability. One of the dilemmas of interoperability is not just, as I indicated, finding ways 

to hook up the wires. We have to learn to define things in the same 

way. The glossary of terms that we use to describe things has to 

be similar. We will have a number of hospitals linked this year for 

trial. We expect to have dramatically more the next year, and it is 

our ambition, in a relatively short timeframe, to have all 36 major 

cities and all 400 plus emergency rooms operating on an interoperable basis. 

This not only has value in terms of our near-term bioterrorism 

needs, it is also driving the decisions that need to be made that can 

be used in e-prescribing and could be used in an electronic medical 

record. Once we have established the basic decisions on the standard we are adopting, this will begin to grow in its proportion rapidly. 

Senator CONRAD. Let me just very quickly turn to another subject, because we are about to face the roll-out of Medicare prescription drug plans, and I tell you, it is very much on the minds of people in my State. People have already approached me, very concerned that there is going to be confusion, and if there is confusion, 

that will reduce sign-up and that will reduce participation. Can you 

give us some insight on what you are doing to roll this plan out 

in a way that people understand it and are not confused by it, and 

that we do not have so many plans circulating out there that people cannot reach a decision? 

Secretary LEAVITT. Senator, yes. I am spending at least 2 days 

a week—I will be leaving again tonight to go out to visit local communities throughout the country. We are in the first phase of our 

roll-out. The first phase of our roll-out is to meet with local community groups. I must tell you, I am quite heartened by what I am 

feeling and seeing. We will see roll-out over the course of the next 

10 months, a national conversation, a national conversation that 

will include literally tens of millions of different venues. 

232

It will be as simple as a daughter sitting down with her aging 

parents to say to them, ‘‘Mom, Dad, I need to help you assure that 

you have made a decision on this prescription drug plan.’’ It may 

be a pastor who organizes a committee at his or her church to help 

the members. It will be a pharmacist at a store counter dealing 

with a customer, who has a trusted relationship. It may be a doctor 

dealing with a patient, or a nurse at a community health center or 

a senior center. And we are seeing groups, seniors organizations, 

community groups, mayors, county commissioners, State Departments of Health, all who are rallying to help a common constituency of seniors to make this decision. 

I feel a sense of real optimism, that while it will not be perfect 

in its execution, and while it will not be without complexity, at the 

end of the period of time we will see between 28 and 30 million 

people who will have enrolled in this remarkable new health benefit. It is in fact among the most significant events in health care 

in a half century. 

Senator CONRAD. Can I invite you to North Dakota? 

Secretary LEAVITT. I would love to come to North Dakota. 

Senator CONRAD. We are asking the churches across our State to 

get involved in a very meaningful way, and we would love to have 

you come. 

Secretary LEAVITT. I have been in little Havana at a senior center, I have been at a Southern Baptist church in South Carolina, 

I have been at an arboretum in Alabama. It is actually very heartening to see these groups come together. The partisanship is gone 

now. This is out in the community. People are rallying for a particular cause. This is a moment, I believe, in our history where people are going to unify to deliver it. 

Now, I do not want to create an expectation that there is not 

going to be a decision to make for people. There is. We will have 

multiple plans that they can choose from in a way that will allow 

them to pick a plan that is best for them, and seniors are going 

to want to hear this over and over and over again, as we all would. 

Senator CONRAD. Can I just say to you, you have not lived until 

you have gone to a Lutheran Church basement lunch. 

[Laughter.] 

Secretary LEAVITT. Senator, I have lived, on that basis I have 

lived. 

Senator CONRAD. We will have the Jello there for you and the 

bars and——

[Laughter.] 

Chairman GREGG. Senator Ensign. 

Senator ENSIGN. I have not lived yet. 

Chairman GREGG. Maybe he is going to go to Las Vegas. 

Secretary LEAVITT. We are coming to Las Vegas. 

[Laughter.] 

Senator ENSIGN. People always make fun of my town, and I always tell them that those are your people acting crazy in my town. 

[Laughter.] 

Senator ENSIGN. Secretary Leavitt, thank you for being here 

today. We just held a markup in the HELP Committee, thanks to 

Senator Enzi’s leadership on the issue of health information technology. As you know, I held at the Commerce Subcommittee on 

233

Technolgy, Innovation and Competitiveness on this issue. I really 

believe that health information technology is one of the more important issues that we are dealing with in health care today. 

Health information technology does provoke careful thought and 

discussion. It is difficult to determine for the electronic exchange 

of health information. 

We have a lot of experience with individual information systems 

and how bad they can be, how they over promise, and how they 

under deliver. For example, I remember when I was first running 

for Congress in Nevada and I spoke with the person who oversees 

all the welfare programs. The person had developed proprietary 

software with the assistance of outside help. This software was 

going to completely computerize their whole system, and make it 

much more efficient. They finally got it online in late 2000 at about 

three times the cost of what it was originally supposed to be. 

A lot of us have had negative experiences with information technology. As a veterinary practitioner, we were always over promised 

and under delivered on what software was going to do. A lot of individual physicians have experienced some of the same things. 

Consequently, there is some trepidation in the health care community, especially for those people on the front lines. And, as we 

learned in our Commerce Subcommittee hearing, a lot of the information technology related benefits of improved efficiency and quality of care accrue to the payer and patients, but not to the providers who bear most of the implementation costs. 

I think interoperability is a critical aspect in our discussions on 

health information technology. There is no question about it. If you 

think you are buying a system that is not going to work with other 

systems, you are not going to invest in a system and put your capital at risk. It is critical that we facilitate the widespread adoption 

of interoperable health information technology. 

The Internet has worked because standards are in place that enable communication, commerce, and information to flow freely. I 

am glad that you are focusing on the issue of interoperability. 

Could you please address the front line physician or health care 

provider who says, ‘‘Why should I invest in health information 

technology when I would receive very little of the benefit?’’

Secretary LEAVITT. Senator, thank you for your question, and I 

am delighted about the markup. I want to express, as you did, a 

compliment to Senator Enzi and the remarkable leadership he has 

shown in his committee. 

There is little question that one of the dilemmas we face is that 

oftentimes the benefit, the economic benefit, does not flow to the 

same party to whom the investment is required and that there will 

be a transition as we help people work through this adoption process. 

There are a number of ways in which I believe that can and will 

occur. One I mentioned earlier, and that is the pay for performance, being able to identify methods of responding to payment that 

are not simply on the basis of how much treatment is given, but 

the quality of treatment that is provided. If we are able to say to 

a physician—if you can demonstrate that a number of different—

or if you can demonstrate that a high enough percentage of your 

patients have been treated in a particular way, we know we will 

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save money; and as a result, we will share that with you and help 

you with your adoption costs through some kind of pay for performance. That is one way. 

There have been a lot of discussions about exemption to the 

Stark amendment that would in the proper context, when we have 

achieved interoperability, allow systems of health to begin developing networks. 

Over time it has been my observation that it is rarely the technology that limits us. It is almost always the sociology that limits 

us. And, I believe this is just such a circumstance. If we can begin 

to work together, we can create the interoperability, and I believe 

the economic model will follow. 

Senator ENSIGN. Thank you for your response. What you have 

just expressed is what came out of our Commerce Subcommittee 

hearing. I appreciate your comments regarding pay for performance 

initiatives and the idea of best practices. Driving best practices 

down to the lowest level is absolutely critical. BY encouraging the 

use of best practices, you can achieve better outcomes that we are 

all talking about. 

Thank you, Mr. Chairman, for holding this hearing. 

Chairman GREGG. Thank you. 

Senator Murray? 

Senator MURRAY. Thank you very much, Mr. Chairman, and 

thank you, Mr. Secretary. And while I have the opportunity, let me 

just thank you for working with us on the nomination of Dr. 

Crawford to head FDA. I was, as you know, very frustrated on the 

planned BOTC application and the fact that, despite the overwhelming scientific and clinical data, there wasn’t a decision made 

and PDUFA deadlines have been missed, and I really appreciate 

your July 13th letter and working with us to assure that FDA is 

going to finally act on this application. And I wanted to just take 

this opportunity to publicly thank you for that. 

Secretary LEAVITT. Thank you, Senator. 

Senator MURRAY. This is a very important issue, and I think it 

is critical for us, looking at cost savings and numerous other 

things. But you raised in your testimony when you spoke an issue 

that I think this has direct impact on, and that is the Medicare reimbursement. It is an issue I have been long frustrated at, that 

Medicare rewards inefficiency, basically, and overutilization. It 

hurts States like Washington that are very efficient. We have one 

of the lowest per beneficiary cost in the country, and so we are very 

much at a disadvantage in a system that does not reward doctors’ 

being more efficient. And I wanted you to comment on your written 

testimony where you talk about the Medicare management performance demonstration and how we can make sure that when we 

structure this new health IT effort in Medicare, we do it without 

providing more disincentives in reimbursement rates that could 

just cause more problems and more costs in the future. 

Secretary LEAVITT. The subject of Medicare reimbursement rates 

is one that I am constantly having conversations with Members of 

Congress about, particular conversations relative to their area, 

whether they feel that the reimbursement levels in their area are 

fair or not fair. And we are working to respond to those on a situation-by-situation basis to do our best to be fair and responsive. 

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The subject on a global basis or macro basis is very complex and 

one, frankly, that we are going to be dealing with very shortly as 

you deal with the budget. We are under obligation statutorily to 

continue to move forward with what will be a 4.3-percent reduction 

in Medicare reimbursement rates. There have been many who believe that is not reasonable. Nevertheless, it is the statute, and we 

are moving toward implementation of it. 

That is one of the reasons that the topic of pay for performance 

is so integral to the conversation we are having on health information technology. We will never achieve a more rational way of paying and incenting providers without being able to accomplish interoperability and a national system that will allow us to gather information and measure outcomes and then compensate, at least in 

part, on that basis. 

So having these two conversations linked is a very appropriate 

response. 

Senator MURRAY. I agree, and I think we all want to work with 

you toward that goal. 

I had the opportunity a short while ago to visit a hospital in Spokane, Washington, with the Inland Northwest Health System that 

was doing something very innovative in IT, and that was providing 

pharmaceutical and pharmacy access to rural hospitals through 

their technology at that hospital linking up with rural communities 

in eastern Washington and doing the pharmaceutical prescriptions 

for patients there. And I think there is a lot of really exciting opportunities. 

But as I hear all this talk about technology, I hear a lot about 

how it helps doctors, how it helps hospitals. I want to make sure 

it helps patients, and I think patients’ having access to their own 

records will provide tremendous savings for us as well. 

Senator Conrad talked about his own father and all the medications he took. Sometimes I think patients can be the best savers 

if they actually have records and their own information. People too 

often go and get a diabetes test or an osteoporosis test, never go 

back and ask what the results were, so they do not know what they 

can be doing for their own health and actually cost savings. 

How can we make sure that in this effort we make sure that patients have access to their own records through IT? 

Secretary LEAVITT. Patients do need to both own and control 

their own records. Most of all, we need to have a way in which they 

can access them. 

I have experienced recently this dilemma on a very personal 

basis. I went to the hospital to have one of those over–50 tests that 

we all look forward to so much. And I was handed a medical clipboard as I walked in the door, a ritual in American medicine. I 

spent the next hour filling out my name and my address and my 

insurance information over and over and over again. 

Finally, I got to the point of the test, and the physician sat down 

with me one more time to say, ‘‘Now, let’s ask you some questions. 

Have you had a reaction to prescription drugs?’’ I mean, we have 

all been through these questions before. And then he said, ‘‘Do you 

have any serious medical problems?’’ I said, ‘‘No, I have no serious 

medical problems.’’

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Well, just by coincidence, I guess, or at least I was prompted to 

say, ‘‘Well, I do have sleep apnea.’’ He said, ‘‘I need to know that 

because I am going to put you under an anesthetic for this, and 

that is a very important piece of medical information.’’ That was 

a medical mistake. It was my mistake. He asked me the questions. 

I did not answer them. Had I had an electronic medical record, 

that would have very clearly been there. It would have saved me 

the hour that I took filling out my name and my address and my 

phone number and a health history that I could not properly remember. That is the way it will benefit patients. 

There are many ways. I have a colleague who indicated she needed to take a half a day off work. I asked her the next day, ‘‘How 

did it go?’’ She was going to the doctor. She said, ‘‘I spent most of 

the day being a medical courier. I went from doctor’s office to doctor’s office picking up brown envelopes to deliver them to a doctor’s 

office.’’ That could have and should have been done with the click 

of a mouse. Think of the half-day of unproductivity that it cost 

her—and, I might add, her employer. 

This is about lower costs. It is about less hassle. It is about fewer 

medical mistakes. This is about transforming medicine as we know 

it today. It is about being able to deal with Medicare, Medicaid, national defense. This is a very significant undertaking that we are 

about. 

Senator MURRAY. I agree, but I just think we cannot lose sight, 

as we work through this issue, that the patient having access to 

their own medical records is an important part of technology and 

that patients will actually make better decisions. I know there is 

this fear in this country that, you know, doctors have to keep the 

information and we should not maybe know everything we should 

know about ourselves. But I think we will actually find that if patients know themselves what their tests show and what they are 

taking, they can do a better job of preventive medicine. 

And, Mr. Chairman, preventive medicine is what we all need to 

be focused on to save dollars in the long run in the health care system. 

Chairman GREGG. We will next hear from the man who is going 

to straighten all this out, the Chairman of the HELP Committee, 

Senator Enzi. I apologize for the duplication of this hearing with 

your markup, but the Secretary asked that we set it up. 

Senator ENZI. I think it is outstanding that we are having this 

hearing. I am just so excited today. I love numbers and I love technology, and bring it all together at one time. I want to congratulate 

the chairman for the extensive work that he has done on this. I remember being on a task force that he led a year and a half ago 

when we talked about ways to solve medical crises in the United 

States. And I am doing 18 bills that you brought up at that time, 

and this is one of them. 

Chairman GREGG. That is why I left. 

[Laughter.] 

Senator ENZI. It is keeping us busy, I want you to know. This 

is probably the key one to all of the rest because everything builds 

on information, patient information and their access to it and what 

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sibilities with it that we need to tap and we need to tap right away. 

And I want to thank you for getting that started last year. 

I want to thank the Secretary for being here. He and I have had 

numerous meetings. In fact, we have had numerous meetings for 

several years, because he has been deeply involved in technology, 

in computers, and, in fact, was key in starting the Western Governors University, which I think was the first online degree-granting university probably in the world, and he put that together. So 

I have seen his capability of being able to understand technology 

and to work with technology and, probably even more importantly, 

to bring other people along in understanding it. He has a tremendous gift for making things very clear and simple enough that even 

I can understand them. That is a gift. He has a great example of 

train tracks that he did not get to use this morning, but he has 

been using it across America as he puts all this together. 

Now, I share your concerns and those of Chairman Gregg and 

Senator Ensign about spending wisely on IT. I am certain that we 

will work to make sure that we are filling the financing gaps. And 

I am pleased that we were able to pass the bill this morning in 

markup, and what it does is give express authorization to Health 

and Human Services to do the work that Health and Human Services has been involved in for a couple of years, but is now coming 

to a head and I am sure will get on track and completed in a very 

short period of time under your leadership. 

We wanted to make sure those specific areas of authorization 

were there, and I do want to commend you for taking the helm at 

HHS and moving quickly to implement the President’s vision that 

everyone in America have electronic health records by the middle 

of the next decade. And I think under your leadership we can exceed that. 

Senator Grassley and Senator Baucus intend to move their legislation through the Finance Committee to build the pay-for-performance measures into the Medicare program. What else do you think 

Congress can do to assist you to make this shared vision a reality? 

Secretary LEAVITT. That is an appealing question. Thank you. 

May I just respond that I have now been serving as Secretary of 

Health and Human Services for almost 5 months, and it was very 

clear to me quickly that this subject was right at the heart of nearly every aspect of my mission. Medicare, Medicaid, in order to get 

costs contained where they are sustainable, this is at the heart of 

it. The responsibilities I have for drug safety, right at the heart of 

it. The responsibility I have for bioterrorism, this is right at the 

heart of it. So this was an easy decision for me to put as much time 

as I am on it because it is so critical to every element of the way 

we deal with cost containment in our country. 

And may I just answer directly your question. The most important thing from my standpoint is that we are using what Senator 

Conrad referred to as a laser focus and that we use it on interoperability. If the Congress wrote a $1 trillion check today for health 

information technology and everyone went out and bought systems, 

we would probably get some good systems. But we would not have 

achieved the vision that you have spoken of where we are able to 

reduce costs because of better practices to be able to have lower 

costs, fewer medical mistakes, better care, and less hassle. We 

238

would not achieve that even if we wrote a check for $1 trillion 

today. We have to get interoperability and then begin to work very 

deliberately on solving the problem referred to before by Senator 

Ensign with respect to adoption. 

Both are significant problems. Interoperability is the first one we 

have to solve, and then we have to deal with the adoption issue. 

Senator ENZI. I particularly want to thank you for page 9 of your 

testimony. It shows how you focus in on and prepare and do a 

project, and that is where it lists the four RFPs that you have already arranged for, and I think it is pretty remarkable, since you 

have only been on the job for 5 months, that you already have this 

underway and have taken it to the Nation. 

I see that my time is about to expire. 

Chairman GREGG. Thank you, Senator Enzi. 

Senator Stabenow has some views on interoperability. 

Senator STABENOW. Well, thank you, Mr. Chairman. 

I first want to thank you, Mr. Secretary, for your work with your 

other hats, with the EPA and the work that we did on the Great 

Lakes. I appreciate your leadership there. Positive things are happening as a result of bringing people together. 

Secretary LEAVITT. I am optimistic about that. 

Senator STABENOW. And we thank you for your leadership and 

look forward to the same kind of bringing people together and moving forward on this issue. 

I could not agree more with the comments that have been made 

about this being at the heart of our ability to move forward, both 

for cost savings not only for the Federal Government but for private businesses as well. And also we save lives by doing this. So 

I cannot think of anything more positive than to be focusing on 

this. 

I do want to speak, though, because I have a slightly different 

view in terms of how we need to move forward or the extent to 

which we focus on interoperability alone or making sure that hospitals and physicians and so on are beginning to purchase equipment, do training, move along so that they are ready for interoperability, they are ready for the efforts that are so important. 

When I think about the U.S. Senate—in fact, when I was in the 

U.S. House, we did not wait for interoperability before everybody 

got PCs, before we trained people. Right now we still are not totally 

interoperable in the U.S. Senate. And yet we have certainly benefited from e-mail, even when it was our own individual e-mail system. And look how long it has taken to be able to do that. And if 

we had waited for interoperability, we still would not be on a system. People would not be able to talk to us. We would not be able 

to do our work. 

So I tend—and I just want to share with you, the Center for Information Technology Leadership has estimated $44 billion annually in savings from the use of health IT in independent settings. 

And that does not in any way negate what you are saying. I totally 

agree with what you are saying about interoperability. But we also, 

according to them, are told that we would reduce medical errors by 

50 percent by the use of stand-alone electronic prescribing systems—50 percent. So the question that I have for all of us is: Why 

wouldn’t we want to be working on that at the same time? 

239

I congratulate Senator Enzi for his leadership, and I was pleased 

to testify with Senator Enzi before Senator Ensign’s subcommittee. 

But I think Senator Ensign really has a very important point that 

I agree with, and this is what I hear from hospitals and physicians 

and so on. We cannot wait to begin to get them online, to get the 

equipment and so on. And so I would urge you—and I will be working with colleagues on this—to look at not only pay for performance, which I agree with, but pay for use as an important part of 

that in terms of incentives. And Senator Snowe and I have introduced a bill that goes right to heart of that would allow expensing, 

accelerated depreciation, like we do for many, many other things, 

for private physicians and so on to be able to buy the equipment, 

to be able to get going on this. 

We have in other areas allowed dollars to be spent from Medicare, MRIs, other things, where we knew it would save money by 

allowing purchases of equipment. Our legislation would allow that 

for hospitals and nonprofits to be able to begin to purchase. 

I think it is absolutely critical that we move, Mr. Chairman, on 

a several-track front if we want to meet the goals that you are talking about. And then I would just add that if we really want to be 

able to have the performance standards that we all want, in order 

for clinicians to be able—for us to accurately measure their performance or outcomes, they have to have systems in place. So we 

cannot do that, any of that, all of which we want to do, if they do 

not have systems in place, people are not trained, and so on. 

Also, we have to be able to look at whether we are paying them 

fairly or unfairly, rewarding them, disincentives, and so on. And as 

Senator Ensign said earlier, unfortunately in this process the 

payer, meaning us, gains the savings, and it may not be—where 

the cost is incurred by the physician or the other health care provider, the hospital and so on. And we have to, I believe, provide incentives in grants in order to be able to do that. 

So I hope, Mr. Chairman, that—because I think this is a wonderful bipartisan effort. We have people all across the Senate and the 

House and the administration that want to do the right thing. I am 

very hopeful that we will not just talk about interoperability when 

there is so much more that has to be done in order to get this done. 

Again, I will just close by saying that, again, if we can save $44 

billion a year through health IT in independent settings and have 

50 percent fewer medical errors now, while we are doing the important work that you are doing, I hope that we will not underestimate that. And I honestly believe that we can move ahead on the 

legislation, and I am hopeful we can add legislation that will allow 

us to be able to provide those incentives so that they are ready for 

the interoperability and that we are not in the end doing the good 

work you are doing and then waiting another 10 years while they 

get themselves up to speed in terms of equipment. 

Thank you. 

Secretary LEAVITT. Senator, let me just reinforce the fact that I 

subscribe to what you have suggested with respect to the adoption 

of health IT being an important continuing priority. We are seeing 

substantial investment on health information technology within the 

health sector. It tends to be concentrated more in the large practice 

and large hospitals. 

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One of the worries I have, I was in a major city recently and attended a meeting at an academic health center, a medical school. 

Across the street there was a large county-owned hospital. And just 

down the street there was another hospital that was a children’s 

hospital. All three of them were major medical centers. They 

shared faculty at the medical school, a lot of the same patients. 

Each of them had purchased a different system. Each of them had 

spent nearly $100 million in bringing their hospital IT system up. 

And I am sure they are doing great things within those hospitals 

and that they are making progress. But none of the three could 

talk to each other. 

We are moving with some dispatch, for example, to develop a 

new e-prescribing rule that will have an exception to the Stark 

amendment, which will allow hospitals, for example, to begin sharing technology with smaller providers. That will begin immediately 

to deal with adoption issues. 

We are working aggressively with pay for performance. We would 

like to be able to say-let’s create funds and created savings and use 

part of that savings to help small providers with adoption of technology. 

You are absolutely correct when you say we need to move down 

a parallel track here. My advocacy for the ‘‘laser focus’’ on interoperability is to acknowledge the fact that until we solve that problem, our investment should be focused there because many of the 

benefits that you have alluded to will come only when that has occurred. 

Senator STABENOW. I would only add one thing, and that is, we 

are facing the same thing in Homeland Security. I have been working on issues of interoperability for communications, and police and 

firefighters have not stopped creating their own systems while we 

are trying to get interoperability. And so it does need to be done 

together, and there are now new kinds of technology, software that 

is being created in Michigan. We have a company in Michigan that 

is able to bring together through a common software all of these 

different communications systems to be interoperable for much less 

cost. 

So I think it is just very important that—if our police and fire 

were waiting, you know, they would not be talking to each other 

even in their own communities. So there is a benefit to moving on 

a parallel track. 

Chairman GREGG. Senator Allard? 

Senator ALLARD. Thank you, Mr. Chairman. I feel honored to be 

here with a lot of expertise as far as health care and what-not and 

a lot of brain power, and a lot of thought has been going into all 

these ideas. 

But I do have a hospital in Colorado that is trying to bring everybody online with the same technology as far as communications is 

concerned. And they are trying to communicate with the Health 

Department, communicate with individual doctors’ offices that use 

their hospital, and to communicate within the hospital, and any 

other agency that might be there that would have some health 

records. And they are having a hard time doing it because there 

are a lot of issues involved. 

241

My question to you is: Are you looking at individual circumstances like that and visiting with them to see how these theories get applied in sort of a practical way? I would like to hear your 

comment on that. 

Secretary LEAVITT. Yes, in fact, I think this adds to the last answer I gave. We are actually funding a lot of adoption to help people——

Senator ALLARD. I think this hospital may be getting some of 

your funding. 

Secretary LEAVITT. Yes, and we are working with many different 

models around the country where we are working with different 

hospital groups and working with them to see what can be learned. 

And, the combination of establishing national standards plus being 

able to deal with what we are learning from those individual situations is the key. 

Senator ALLARD. Now, the Veterans Administration, I know that 

they are developing some systems where there is a lot of communication within the system. And so you are going to have the Veterans system. Then you have each hospital with their doctors and 

everything else. I can see a problem when you go and try and—

now you have these entities that have sort of—they have formed 

kind of a cluster built around the technology of that hospital, or 

maybe built around the technology of an agency. It seems to me 

like the real challenge will be to take the next step and get the 

technology of the Veterans Administration to begin to merge into 

maybe the technology around some hospital. Because for either one 

of those entities, now these clusters, to change—they have built 

around a certain amount of technology. Then to get each one of 

them to come, the cost even gets horrendous if they have to make 

changes to their system, and they are going to resist that, it seems 

to me. 

Have you thought a little bit about where the second and third 

step might carry you? 

Secretary LEAVITT. I have thought a lot about this because that 

is the dilemma and really the reason we have to achieve interoperability. The Veterans Administration has a brilliant system. If you 

are in a Veterans hospital system, you have an electronic health 

record that will include virtually every aspect of your medical involvement. 

The problem is if you go to a doctor outside that system, it is not 

populated with that information. And the same is true that the 

doctor outside does not have access to the information. So we have 

to be able to create this sense of interchange in information. 

If you go to Kaiser Permanente in California, you see brilliant 

electronic health records. If you go to the Cleveland Clinic, you see 

brilliant use of electronic technology. If you go to the Montefiore 

Hospital in New York or InterMountain Health Care within our region, you see all kinds of brilliance that is being created in individual regional areas. The problem is none of them can talk to each 

other. 

Senator Enzi referenced a favorite story of mine. I have become 

fond of studying railroads. As we built the railroad network in this 

country, we had one major dilemma, and that is that the rail 

gauges did not line up. They had some that were 4-foot–8, some 

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that were 5 feet, and some that were 5-foot–3. And through some 

good leadership, they standardized that. 

I told a friend of mine about this. He said, ‘‘Well, I had an uncle 

in 1960 that went to Australia to help them solve that problem.’’ 

I was intrigued by that, and I put into a search engine ‘‘Australian 

railroad gauge.’’ And up popped a whole series of articles about this 

dilemma they have in Australia today. They are trying to solve the 

fact that they have three different rail gauges. And if you want to 

go from Point A to Point C, at Point B you get off the railroad and 

get on a different railroad. 

Well, we are doing the same thing in health care in the United 

States. We have these pockets of brilliance, but we have rail gauges 

that do not line up. And so when I emphasize the need for interoperability along with adoption, the reason is because in order to 

get the long-term vision that we are talking about and the serious 

benefits, we need both. 

Senator ALLARD. Well, I appreciate your railroad analogy, but to 

get back to the medical side of it, when we standardize everything, 

we are going to—and on the cost, I have my doubts. I am a little 

skeptical about that. On the patient care, I am really optimistic 

about that because I think there will be a lot of medical mistakes 

that will not happen. But, on the other hand, if a medical mistake 

does happen, it is going to be big, you know, because it is going to 

be built into the system, and it could impact a lot. 

So we have to give some thought about that, and the other thing 

is on, as we move forward with this technology, we need to have 

sort of some latitude in there, which I never expect to happen 

through a bureaucracy, and we are going to have more bureaucracy. I do not see any way around it. It is for innovation. There will 

be some doctors that will have different ideas, some different approaches on treatment and what-not, which probably in the long 

run will be better, and they are going to have to work themselves 

through a bureaucracy that will not want to change because it is 

built into the system. And I hope somehow or the other we can 

keep that needed flexibility as we move forward in trying to standardize treatments and standardize information protocols. 

Chairman GREGG. Those are excellent points. You are obviously 

the big elephant in the room, and you can set the gauge. And so 

we look forward to working with you. If you need legislative authority to help you on this, you have the man right here. And we 

want to work with you to make sure this is successful. 

I know that Senator Conrad had one followup request relative to 

a report he would like to try to get, which I think is a good idea. 

Senator CONRAD. Let me ask, if I could, could you help us get 

a report on CDC’s ability to communicate in real time with major 

health care providers around the country? Let me tell you what my 

concern is. 

The group that I mentioned before, the Telehealth Caucus, we 

have previously done a lot of analysis on bioterrorism. What would 

happen if, God forbid, there were an event somewhere in the country? What is our ability to respond in real time? What is the ability 

to analyze what it is and communicate with those who would be 

the first to confront the victims and confront providing care to victims? 

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Our assessment is we are not in good shape there, and what I 

would request directly is that—and we can talk about what is a 

reasonable amount of time. I would hope in 30 days that we could 

get a report on what is the ability of CDC to communicate in real 

time with major health facilities across the country in the case of 

a bioterrorism event, in the case of a pandemic. Those two I think 

are the great potential threats that are out there, and we should 

know with great certainty how well prepared we are to have our 

major institution that can deal with analysis and diagnosis communicate in real time with the major health care institutions across 

the country. That may be an absolutely critical matter. We know 

certainly with the case of a pandemic being able to respond quickly 

and in the right way can make a massive difference in the outcome. 

And so that is a request I would make. Would 30 days be reasonable?

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Secretary LEAVITT. Senator, we will be responsive. Perhaps we 

could talk offline about the timeframe. Thirty days does not seem 

unreasonable to me as I speak, but I should confer with my colleagues. 

I will tell you that we are exercising constantly on this exact 

point. Our capacity does not meet our aspirations. We have to improve here. We have project that I referred to earlier called 

BioSense. It is an active, aggressive effort on our part to take information technology and to use this project to move our capacity forward rapidly. We have identified 36 cities that contain, I believe, 

400-plus emergency rooms. Our intent is to have them interoperable and able to deliver the information you have talked about in 

a relatively short timeframe. We are not there now. 

Senator CONRAD. OK. I think it is just very important that we 

know here exactly where we are today, where we are headed. Are 

there steps that we need to take that would help? Because, you 

know, I think this is a major vulnerability for the country, and we 

need to make very, very certain that we are focused on this as well. 

One other point I would like to make, and this is my concluding 

point, Mr. Chairman. I have become absolutely convinced, after 19 

years here, that anytime we are doing these kinds of major efforts 

that we test and compete. And what I mean by that is that we do 

not just go down one road, that we go out there and we try variations and we get different groups to try different approaches and 

that we put them in competition. 

I am very, very worried in Homeland Security, for example, that 

we are going to roll out a big program on border security without 

having tested it and without having competed it. And we have had 

this conversation with the Homeland Security Director. The same 

thing applies here. Let’s not do something that we have not tested 

and competed because that is what helps prevent major, major 

malfunctions and major wastes of money. 

Secretary LEAVITT. Our effort is to develop an architecture upon 

which many innovations can be found and lots of testing and competing can be conducted. I subscribe to the philosophy you have articulated. 

Chairman GREGG. I want to join Senator Conrad. In fact, when 

we did Project BioShield 2–1/2 years ago, we had extensive discussions with Dr. Gerberding about her concerns that she did not have 

real-time capability to communicate. I know efforts have been 

made in this area, and I think it is appropriate that we get an update as to how successful those efforts have been, because it is a 

critical issue. I know she is very concerned about it—or I am sure 

she is still very concerned about it. She was then. 

Senator Enzi had a followup question and then Senator 

Stabenow. 

Senator ENZI. Just briefly, to end on a very positive note. I feel 

compelled to mention three Wyoming inventions that answer some 

of the questions here, but there is this problem of information in 

the United States. There is technology out there that we do not 

even know about that we are going to find out about from this 

project. For instance, a fellow at the University of Wyoming has invented a little thing that looks like a little speed gun. It is a little 

bit smaller than that. You point it at any substance, pull the trigVerDate 0ct 09 2002 09:45 Nov 21, 2005 Jkt 000000 PO 00000 Frm 00255 Fmt 6601 Sfmt 6601 C:\DOCS\22429.TXT TISH PsN: LAF
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ger on it, and in the PalmPilot you can find out what that is in 

a matter of seconds. 

Not only that, the PalmPilot then tells you what to do about the 

incident. You know, right now we collect samples around this 

building. We haul it out to huge vans that we put this stuff in. 

There is a handgun that would make that technologically faster. 

And there is a PalmPilot that was used in 9/11 events that told 

them what to do with the different kinds of chemicals and things 

that they came across. That was also a little Wyoming invention. 

And then, third, there is one for doctors that is used by our submarines that, again, is a PalmPilot technology, that kind of a computer that they put in symptoms of a sailor and they can come up 

with a confirmation of their diagnosis. Without that, they used to 

have to surface the submarine. Some of those are under the polar 

ice cap. The Federal Government anticipates that saves $600,000 

a year. And rural doctors can use that same sort of thing to confirm 

their diagnosis. 

So there are some very positive things out there. I do remember, 

though, that I am still trying to get permission to take my laptop 

on the floor of the Senate. So this is not the best place to talk about 

technology. 

[Laughter.] 

Chairman GREGG. Submarine technology in Wyoming, that is 

creative. 

Senator ENZI. Yes. We have a Powder River Navy. 

But we are going to have to be more positive on this interoperability or, as I prefer it, the standards harmonization. Regardless 

of what computer you have, what software you have, you can now 

e-mail anybody in the United States that also has a computer. And 

you do not have to know how it got there or much about how to 

do it. And you can also search the Web from virtually any computer, and you do not have to know much about that either. That 

is interoperability of information, and that is what we are talking 

about now for health care. What we have to throw in, of course, 

is the privacy and the security so that the data for the person just 

goes to the people that person authorizes. But I still see the day 

when a person walks into the doctor’s clinic, takes a little fob off 

of their key chain, waves that by their computer, and then releases 

whatever level of data they want to whatever health care provider 

that is. And it will reduce mistakes. 

So I thank you for holding this hearing, and I thank you for your 

efforts on this. You are doing tremendous work on it, and I have 

confidence that we will get it done. 

Chairman GREGG. Senator Stabenow? 

Senator STABENOW. Thank you, Mr. Chairman. 

Speaking of technology, I want to brag about Michigan. I cannot 

let Senator Enzi brag only about Wyoming. Talking about those 

fobs, my new vehicle, which Senator Conrad has seen, which is a 

Cadillac STS, made in Lansing, Michigan, does not have a key. It 

has what is called a fob. You just get within 3 feet of the automobile. You can turn it on. I never take that out of my purse. 

There is no key. We would be happy to have that fob become the 

health IT fob for the kind of thing that Senator Enzi is talking 

about. 

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I share Senator Enzi’s enthusiasm and excitement about the opportunities. I have one comment and one question. 

The comment would be that the kinds of things we are talking 

about today, those individual items that Senator Enzi talks about, 

they cost money. And it is separate from interoperability. It is 

about whether or not the hospital or the doctor can afford to do 

those things at a time when we are cutting Medicaid, we cut back 

on their resources. 

If we do not take seriously providing tax incentives and resources, even though it saves money, it is going to be tough for a 

lot of folks to do that. 

And I would also say on your railroad connection that they were, 

in fact, using those railroads across States even though they did 

not connect all the way across the country and probably benefited 

from using that. 

And so, again, there is a lot of mysticism around all this stuff, 

and I certainly am not an expert. But I do know it is just about 

software in order to be able to make these connections, and that 

right now every vendor is including in their contract something 

called backward compatibility so, in fact, they can become interoperable. So this is not that they cannot use the equipment. It is 

not that the people who are trained cannot—you know, this is 

about software. And so I welcome the fact that you are doing that, 

but it does not take away from the other things that have to happen in order to make it happen. 

A question. I know there has been a lot of progress regarding 

standards, and I know that the Consolidated Health Informatics 

initiative that was begun by your predecessor has made a lot of 

standards available. They have been adopted for 3 years now. And 

I am wondering if you can tell me which Federal agencies or programs are currently using those standards internally and what 

their relationship is with health care providers. 

Secretary LEAVITT. We did adopt a group of standards, and the 

next logical step is full Federal implementation. That is one of the 

reasons we have set up this American health information community to be able to achieve full adoption by Federal agencies. 

Senator STABENOW. Do we know at this point how many——

Secretary LEAVITT. I am not able to give you off the top of my 

head which agencies have adopted which standards. They have 

been adopted, for example, at HHS, and we are beginning to roll 

them out. But adoption of the standards is going to be a critical 

part of it, there is no question. 

Senator STABENOW. Absolutely. Thank you. 

Thank you, Mr. Chairman. 

Chairman GREGG. Senator Conrad for the last thought. 

Senator CONRAD. Let me just say, not to be outdone, in North 

Dakota——

[Laughter.] 

Senator STABENOW. I move to adjourn. 

[Laughter.] 

Chairman GREGG. In North Dakota, they are doing aircraft carrier technology. 

Senator CONRAD. In North Dakota, we are working on a fob that 

would start your car and give you your health care records. 

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[Laughter.] 

Chairman GREGG. Thank you, Mr. Secretary. We appreciate your 

time and your courtesy. 

[Whereupon, at 11:15 a.m., the committee was adjourned.]

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